New law eliminates check float
April 19, 2004
Banks in northern Nevada are gearing up for a change this year that will have a dramatic effect on the way many of their customers do business.
To put it bluntly, business and consumers that usually figure they have a few days to make a deposit before a check clears the bank are about to see the disappearance of float.
1, many checks will be clearing the same day they’re received even checks written to outfits halfway across the country.
Here’s how it works: Bill Martin, the chairman and president of Nevada State Bank, explains that laws regulating commerce for well over a century have required that banks demand a physical check that little piece of paper before they make payment.
So when you deposit a check in Reno from a customer in Boston, your bank first sends the check to the Federal Reserve Bank of San Francisco.
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It’s flown to the Federal Reserve Bank in Boston, sorted and sent to your customer’s bank for payment.
That bank then has 24 hours to pay the check or return it.
The whole process can take two days maybe three and a fair number of folks who write checks have learned they don’t need to rush to the bank to deposit money to cover the checks they’ve written.
Martin says that the days after the Sept.
11 attacks showed a weakness in the system.
Because flights were grounded for days, the payments system in the United States ground to a halt.
“When you stop the payment of checks, it’s not a good thing,” Martin
So a federal law adopted late last year devised a way that checks can be paid without hauling bags of checks from one Federal Reserve Bank to another.
The new law, which takes effect in October, allows banks to pay if they receive what is called a “substitute check” a digital image that can be zapped across the country at the speed of light.
“Float will be a thing of the past,” says Robert Hemsath, president of Northern Nevada Bank in Reno.
The other big change for consumers is this: Even if they want a bundle of cancelled checks with their monthly statement, they won’t be able to get them.
Among Nevada State Bank customers, more than half don’t want their checks back, Martin says, and his bank and most others have been steadily getting out of the business of returning cancelled items.
Many banks in the state, for instance, now charge a few dollars a month to deliver cancelled checks.
But some bank customers really want their checks back and won’t be satisfied with mere images.
“It creates a customer-service headache,” Martin says.
People don’t like change.”
The federal law requires notice to bank customers with special notice to those who currently get their checks back and banks are gearing up their own information campaigns.
At the same time, however, smaller banks are struggling with the investments required under the new system.
Hemsath, for instance, estimates the cost of scanners and other gear to create and receive substitute checks at $100,000 for Northern Nevada Bank.
There aren’t many cost savings in the new program to offset that investment, he says.
First Independent Bank of Nevada, another independent bank in Reno, isn’t convinced of the program’s benefits, says Marianne Buonanno, senior vice president of operations and compliance.
Banks are required to have equipment to receive substitute checks, and First Independent will be ready.
But Buonanno says the bank isn’t convinced that it has much to gain by collecting on checks even faster by creating substitute checks and shooting them across the country especially at a time when interest rates run about 1 percent a year.
A big bank with billions of dollars in checks every day can make a tidy sum by collecting them more quickly, she says.
But a small bank doesn’t have much to gain by speeding the payment of a consumer’s $43.67 check to the grocer.