The initial reaction by consumer groups to Check 21, the Check Clearing Act for the 21st Century, was dismay and distrust. Combined with that was the certainty that the banking industry was trying to rip consumers off by taking advantage of the “float” period, the time between when payment is taken from the paying customers bank account and when it arrives in the recipients account.
Rafael Ayuso, spokesperson for Consumers Union, says, “The new law is expected to save approximately $2 billion a year for banks, but nowhere have we had any assurances that this money will be passed along to consumers.”
Check 21 can reduce the time it takes to deduct money from a check writers account, but it doesnt require banks to move the money over to the recipients account any faster. In response, Congressional Representative Carolyn Maloney (D-N.Y.) introduced HR 5410, called the Consumer Checking Account Fairness Act, which requires the Federal Reserve to exercise its authority to reduce the time banks can hold deposits to reflect the faster times checks clear under Check 21.
Maloneys proposal also prohibits a bank from charging a bounced check fee if the funds are in fact in the account, even if the deposit hold period has not passed. It requires banks to clear deposits before checks presented on the same day, and requires banks that clear checks on Saturdays to count Saturday toward the deposit hold period.
One piece of Maloneys proposed law amends Section 607 of the Expedited Funds Availability Act (12 U.S.C. 4006) by adding a subsection that requires banks to post transactions that increase the account balance before posting transactions that decrease it. This section is to be applied only to checking accounts that are used primarily for personal, family or household purposes.
Most banks already differentiate between personal and business checking accounts, so it shouldnt be a big stretch for bank back offices to post those deposits before withdrawals. Thats standard practice already, for the most part.
Banking officials have said, in the run-up to Check 21, that they would primarily use image replacement documents (IRDs) to speed large transactions. The limited evidence available to date supports the earlier assumptions that the large business-to-business transactions are the ones being expedited.
This piece of legislation would not be necessary if consumers trusted their banks to pass on to them the benefits of automating the payment process. Banks can also calm consumer fears by clearly communicating what theyre doing as far as generating and exchanging IRDs.
Check 21 merely required banks that receive IRDs to treat them like paper checks. It did not require banks to generate them, but consumer groups have reacted as though every paper check in the universe is about to be destroyed. Many consumer groups also assume that banks are using the law just to deduct money faster. That feeling could be offset should banks make public their policies on speeding deposits as well.
One section of Maloneys proposed law that addresses a real consumer need is the one that covers Fees for Services not Requested. In this section, the law states, “No depository institution may impose any fee for paying any check drawn on an account in spite of a lack of sufficient funds in the account to pay such check or any similar activity (commonly referred to as `bounce protection) unless the accountholder has affirmatively requested such service.”
In English, the law is asking banks to not charge customers for services they havent explicitly signed up for, specifically overdraft protection. Such protection gets costly when the bank covers a payment that would have otherwise bounced, charging not only a bounced check fee but also a fee for the funds used to cover the check.
Check 21 will certainly boost the acceptance of electronic check images, but the systems required to generate and exchange those images are still in development and standards are still evolving. As this evolution goes on, consumers would be well-served by banks that clearly explain what theyre doing, and publicize the ways that speeded payments are helping.
The alternative is a web of new laws that will control the evolution of IRD exchange. Since most regulations end up on the books in response to abusive practices, the banking industry can do itself a favor by avoiding the perception of any action that could be interpreted as hurting consumers. Clear information and consumer education are key to avoiding excessive layers of rules and regulations.
Bankers, start your education engines.
Theresa Carey is the editor of eWEEK.coms Finance Industry Center. Shes been writing about financial technology issues since 1990 for a wide variety of publications, including PC Magazine, Newsweek, Fortune and Fortune Small Business. She is also a contributing editor to Barrons and writes its “Electronic Investor” column. She can be reached at firstname.lastname@example.org.
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