With so much written and discussed about Check 21, it's often difficult to separate fact from fiction. Managers of most community banks understand that the federal legislation, formally known as the Check Clearing for the 21st Century Act, will allow them to embrace more efficient check collection by reducing costs of equipment, staffing and transportation. It becomes effective October 28. Yet in the short term, it will have a minimal effect on the way banks process checks.
Customers of community banks, however, may not be as well informed. Some may fear that paper checks will disappear for good. As October 28 draws closer, customers of community banks will be asking more questions.
Preparing for the coming of Check 21 is analogous to the 1999 preparations for Y2K. Spurred by mandates from the federal government, community banks did an excellent job of keeping customers informed about their Y2K plans, allowing them to show customers they were up to speed on technology and just as prepared as mega-regional and non-financial institutions.
Check 21 offers community banks a similar opportunity. While customers initially may see few, if any, changes when the legislation first takes effect, community banks can position themselves as sources of information and take the lead in educating customers. Maintaining a defensive posture or sidestepping questions about the legislation does not resonate with customers, who may see such a bank as backward or uninformed.
While there are federal mandates for informing customers about Check 21, community banks should be proactive in their efforts. Giving customers all of the facts will alleviate any fears and maintain the high level of trust between the community bank and its customer. That means starting now.
Check 21 requires banks to distribute a substitute check notice describing the substitute check and disclosing the recourse for consumers who allege a loss because a substitute check was provided rather than the original paper check. The law requires banks to distribute this notice as part of its first regularly scheduled contact after Check 21 on October 28. However, community banks shouldn't wait. Community banks should go beyond the minimum requirements and send letters fully explaining the legislation and expected changes. By focusing on the customer impact, community banks demonstrate they understand customer concerns and how regulations directly impact them. Some points to address:
* Check 21 allows banks to reduce the risks, time and costs associated with paper check processing and transportation. Instead of relying on physical transportation via plane or truck, banks can replace them with substitute checks created from digital files. Banks can then send the images electronically. Of course, reduced processing time can also speed up the timing of the withdrawal of money from the check writer's account. Customers who write a check on Wednesday and expect a deposit on Friday will cover the float will have to change their habits. Although such a practice was never legal, Check 21 will effectively preclude it.
* Check 21 streamlines the process. Customers do not have to change what they do. Banks and their customers must simply be prepared to accept substitute checks if such checks are received by the forwarding bank.
* Check 21 gives consumers rights. If a check is paid twice, paid for the incorrect amount, or otherwise paid in error, the customer has the right to have the funds credited to his account within 10 business days, provided a substitute check was used. At least $2,500 must be credited within 10 days if the amount in dispute is larger than that amount. Up to the full amount must be paid after the 45th day of the claim.
* Tellers and platform staff should be fully apprised of Check 21. The FDIC recommends that institutions update policies and procedures and reevaluate employee training. A Check 21 fact sheet to explain the basics of the legislation and its impact on customers when they write checks and receive their cancelled items will help employees better understand the legislation. A briefing that allows employees to ask questions is another good suggestion.
Check 21 is part of a larger technological revolution that has changed banking over the past 25 years. Change can be difficult and costly. Many customers don't react well to change and may even resent it. But community banks that embrace modernization and take the time to educate and inform will be viewed by customers as forward-thinking institutions.
