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Tilting at Windmills

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March 20, 2006
By: Kevin Drum

FINANCIAL QUERY....I just got a call from my mother. She says that she recently paid her telephone bill by check, but when her monthly statement arrived the canceled check was nowhere to be seen. Instead, the amount of the bill had been electronically deducted from her checking account.

So she called her bank, and was told that legislation passed in 2004 allowed companies to do this without asking permission from the consumer. Has this happened to anyone else? Does anyone know what this legislation is? What's going on?

UPDATE: And the answer is: the Check Clearing for the 21st Century Act! I don't really have an opinion about whether this is good or bad, but when mom asks a question you're obligated to hustle up an answer, right?

Kevin Drum 9:14 PM Permalink | Trackbacks | Comments (47)

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Check 21.

Posted by: La Brea on March 20, 2006 at 9:16 PM | PERMALINK


Posted by: La Brea on March 20, 2006 at 9:17 PM | PERMALINK

Happened to me when I paid for car repairs by check.

Hey, I wrote the check, I knew the money now belonged to the repair company. Is this a big deal?

Posted by: MountainDan on March 20, 2006 at 9:19 PM | PERMALINK

Happens all the time here in Kentucky. I was baffled by it at first, too; now I'm used to it. My only question is this: why some companies do it and others don't. If I write five or six checks for different bills (credit card, loan, telephone bill, etc.) some will do the electronic deduction, some not. But once a company does it electronically, it's never done by paper by them again.

Posted by: Paul Griner on March 20, 2006 at 9:19 PM | PERMALINK

It's called check truncation and it obviates the need for shipping checks physically to the bank they are drawn on for presentment. The Federal Reserve project that put it in place was called Check 21. Although check truncation has been studied since the 1980s when I worked at the Fed, after 9-11, when all flights were grounded and checks couldn't be moved, it really through the federal payments mechanism into disarray. A boon for business, as they get use of thier funds sooner from customers paying by check, it virtually eliminates the old check "float" that people played so skillfully back in the day...

Posted by: Stephen Kriz on March 20, 2006 at 9:24 PM | PERMALINK

Some banks still return a canceled check as a customer service, but the practice is becoming rare.

Posted by: grape_crush on March 20, 2006 at 9:25 PM | PERMALINK

Its bye bye playing the float. Basically it is the same as a debit card.

Kevin get used to it. If the electonics are capable of doing this then it will get done.

Posted by: Big Red on March 20, 2006 at 9:25 PM | PERMALINK

Happened to me for a while with my credit card, but then it stopped and went back to the old way.

I don't understand why they think it's any better; a check still has to be processed. Maybe it's cheaper when dealing with people who actually get their cancelled checks back, but that seems to have gone along with five-and-a-quarter-inch floppy disks...

Posted by: bleh on March 20, 2006 at 9:26 PM | PERMALINK

It's been going on here in Springfield, Il. for a year or so. It puzzled me at first when I had to look on my bank statement on a different page for the checks that hadn't seemed to clear but from which the money had been taken.
Now these checks are shown on the main page as a "converted item". Better than before.
But all done without notice (as far as I can tell).

Posted by: Doc Mueller on March 20, 2006 at 9:29 PM | PERMALINK

Tell mom to pay bills online and save a tree, not to mention reducing the hydrocarbons spewed by jets needlessly flying sacks of cancelled checks around the country.

Posted by: Tom on March 20, 2006 at 9:33 PM | PERMALINK

As one who lived for some years by playing the float, I can't say I like the new process, but the most annoying thing is that when I review my a=ccount on the ATM, the electronically-processed checks are listed as "preauth[orized] debits," without a check number Because there's no number, it can be difficult to tell what creditor has got its money and which one hasn't.

Posted by: JonM on March 20, 2006 at 9:40 PM | PERMALINK

I don't understand why they think it's any better; a check still has to be processed.

The check gets "digitized" (converted to an image and an electronic record of account number and amount) at the first point of contact (usually a lockbox location in the case of payments to big companies). At that point the money is moved electronically, the original check destroyed, and the image sent back to your bank. If your bank has a halfway decent online offering, you can probably see the image on your online banking service for several months afterward (and download an image file of it for reference should you want to save it for taxes, etc.)

Posted by: Tom on March 20, 2006 at 9:43 PM | PERMALINK

Yeah, I was doing returned checks awhile back...

Anyhow, they copy the check, it's stored locally, then the transfer is done nearly instantaneously. The check is then destroyed, but a copy is kept electronically.

This will reduce the overhead cost of transporting and verifying checks, which despite the huge amount of machinery built for the purpose (and none newer than thirty years old), is a very manual-intensive job.

This isn't a problem in the US, but second-world countries might find it a home for fraud. Dunno.

What it mostly means is: 'There's another job that existed for my parents, and not for me.'

Posted by: Crissa on March 20, 2006 at 9:44 PM | PERMALINK

On line?? before i became christian i was like internet pirat who hunted on credit cards numbers, and e mail box... But now i'm believer :D Anyway don't pay online, and don't tell anybody that you are paying online.
Clich for new Bible

Posted by: gubiowsky on March 20, 2006 at 9:44 PM | PERMALINK

When I moved last time I got several boxes of blank checks. Now that we've moved to electronic bill pay, I doubt I'll ever use most of them. Girl Scout cookies and the firewood guy are about the only thing I use checks for anymore.

Frankly if you offered me to go back to paper checks I wouldn't. No checks to write, no stamps or envelopes to address.

Posted by: jimBOB on March 20, 2006 at 9:44 PM | PERMALINK

My bank (Bank of New York) stopped returning cancelled checks about a year ago. Now I just get photocopies of the checks in the monthly statements. Less clutter, is my opinion.

Posted by: Peter on March 20, 2006 at 9:45 PM | PERMALINK

A friend formerly employed at the San Francisco Fed told me that once a big bag of checks got open on the tarmac at SF airport, and the Fed employees were called in to round up the checks fluttering in the wind all over the grounds. Yes, they do fly checks around.

I also saw the processing machinery at the SF Fed that handles checks, in incredible quantities. There were carts loaded with checks everywhere. It is amazing the system worked at all. And yes, the machines sometimes broke and ate the checks.

Banks and the Fed hate checks. They are an artifact that will soon be like a buggy whip. You don't think anyone (or any machine) actually checks those signatures, do you? At the Fed, clerks (in duplicate) enter the amount of the check on keypads to encode the check amount in MICR characters at the bottom.

Online payment is actually safer, since the transactions are encrypted - assuming that your pc has adequate anti-virus, anti-spyware software that is kept up to date and scans regularly.

Posted by: JimPortlandOR on March 20, 2006 at 9:45 PM | PERMALINK

The primary goal of the legislation is to streamline the whole check-writing process. One potential concern is that people often write checks and assume that by the time the check is processed, they money will be in the account. However, with Check 21, the money can be withdrawn from your account the same day you wrote the check, eliminating that time period.

Bottom line - you can no longer write checks for which you have no funds. Good thing? Bad thing? I'm not really certain, but definitely a change for a lot of people.

Posted by: cec on March 20, 2006 at 10:03 PM | PERMALINK

There are several things at work here. Imaging checks for statements and research is not new. It's been going on for at least ten years, though some banks have converted quicker than others. Very large and very small banks are the slowest to change--very large because they have to replace buttloads of hardware and software, and very small because of the economies of scale. Imaging made Check 21 possible, which not only reduces courier costs, but virtually eliminates float. With paper checks, if my bank sends 20,000 checks to another bank for collection, my bank doesn't get the money until the physical paper checks are processed by the bank #2. But with Electronic Check Presentment and Imaging, as soon as my bank is done capturing and imaging the items, we can send an electronic file containing MICR line data and images to bank #2 and get our money immediately. This works the same way presenting checks to the Fed. A big part of the way banks make money is by managing the interest earned on the checks presented for collection to other banks and the Fed. The sooner my bank gets credit for those items, the more money they make.

Posted by: Naz Nomad on March 20, 2006 at 10:08 PM | PERMALINK

Just as long as the fraudsters don't figure out how to empty my bank account with check 21 and companies don't have a way to turn a one time payment into a monthly withdrawal without my authorization.

Posted by: toast on March 20, 2006 at 10:16 PM | PERMALINK

Yeah, we went over this in my classes in college. It also ends the concept of "float" that is, writing a check with money you don't have at the time, but will in a day or two.

Posted by: MNPundit on March 20, 2006 at 10:19 PM | PERMALINK

i worked for cingular customer service and when it kicked in every senior was in a panic. it isn't an automated deduction. you have to sign up for that with phyical signature ect. it wont be coming out of her checking account every month. the amount that was deducted was the exact amount they sent in and they still have to keep sending their payments in every month. its a way to cut down on paper transport costs. what they do is just send an electronic copy instead. when it reads "electronic widthdrawl" on their bank statement alot of seniors were thrown for a loop.

Posted by: bob on March 20, 2006 at 10:22 PM | PERMALINK

No "playing the float" anymore, huh?

If you use an electronic bill paying service, it's your *bank* that may be playing the float... My service deducts the amount of a bill payment from my account **2 days** before they credit it electronically to the payee. So my bank (or the bill paying service, which is an outside contractor) gets to collect (at least) two days of interest on every electronic payment.

Posted by: Alex R on March 20, 2006 at 10:29 PM | PERMALINK

Happened to me with my checking account at a Sun Trust branch in Maryland. I do not know (and no of no way of finding out) if the check was cashed by the intended recipient or some other entity.

I live in Italy. The cancelled checks in the monthly statement were one of the many many differences between US and Italian banking which made me appreciate US banks.

Hope the congressment who voted for the act get caught getting their credit ratings criminally buffed (see post above).

Oh also US banks didn't charge absurdly high fees until Bank of America did. made me cancel my very first checking account which my parents had to help me open because I was 17. I kept it because I am an economist and it was one of the first NOW (interest bearing checking) accounts with one of the first ATM cards all opened in September 1978.

Now the bank had been swallowed a few times. It had just been absorbed by "Baybank" when I got there, The became BankBoston, then Fleet Bank then Bank America. All fine by me until they started charging absurd fees.

Posted by: Robert Waldmann on March 20, 2006 at 10:33 PM | PERMALINK

If you purchase by check at IKEA (and others), they run your check, cancel it and hand it back to you.

Welcome to the digital world.

Posted by: SteveK on March 20, 2006 at 10:56 PM | PERMALINK

Yet, when I emptied out an annuity account it took ten days for the bank in NJ to get the check to me in Houston and another nine days for the funds to be available to me after I deposited said check.

What gives?

Posted by: Keith G on March 20, 2006 at 11:24 PM | PERMALINK

I think there's some confusion here. From what I've been able to gather online, Check 21 has to do with electronic images (i.e. photographs) of checks and resultant "substitute checks", which are now considered the legal equivalent of an original check.

What Kevin's mother experienced is usually called Electronic Check Conversion (ECC)--although I also find the term CATC Check-to-ACH conversion. And, in the kind of application Kevin's mom experienced, ARC -- accounts receivable conversion.

According to what I read, electronic check conversion has been around longer than Check 21 and was not authorized by a new act of Congress. There was a regulatory interpretation that all that is needed is for a business to notify its customers that it may convert the checks. Then any checks that are written after that constitute implied consent. Instead of being treated as checks, the checks are now "source documents" for electronic debits. As such, the debits are convered by something called "Regulation E".

Apparently Check 21 substitute checks have some advantages over check conversion. There are tighter limits on liability, for one thing. Also, it can be used for all checks. Check conversion can only be used for consumer checks, not corporate checks, and there are other exclusions: checks without serial numbers, third-party checks, cashier's checks, money orders, government checks, checks payable in a medium other than US currency.


Posted by: Ken Hirsch on March 20, 2006 at 11:34 PM | PERMALINK

It started happening to me a year ago, and only with my Time Warner cable bill. It bothered me because my bank statements don't show the check number and it was confusing at reconciling them.
Now I pay most of my bills electronically. I don't like them initiating withdrawals from my account (not that I'm sure there is any difference between writing a check and having someone debit my account).

Posted by: jussumbody on March 20, 2006 at 11:40 PM | PERMALINK

I stopped getting my cancelled checks mailed to me years ago, and got a service charge reduction for it. I still write checks for most bills although I do some payments online. I don't like automatic withdrawals. My online banking service lets me call up the scanned image of a check whenever I want.

Posted by: tbrosz on March 21, 2006 at 12:42 AM | PERMALINK

I do all my checking by internet, as Im out of the US for the time being. So electronic withdrawals are normal now. That being said, the experience that Kevin's mother describes started to happen to me with Bank of America in Spring 2005.

Posted by: troglodyte on March 21, 2006 at 12:55 AM | PERMALINK

No, they don't check the signatures, but they're quick to restore your funds if you've been stung by a forgery (that, at least, is my experience).

Posted by: Brian Boru on March 21, 2006 at 12:57 AM | PERMALINK

One of the things I noticed first when I moved to Norway is that no one, aside from the very, very occasional old person at the grocery store, uses checks for anything. It's debit cards and credit cards at any place that you purchase things. And for bills, they send you a giro slip, with their account information for you to electronically transfer funds from your account to theirs (or, if you are still netbank-less, which is hardly anyone here, you can go to any post office/postbank and pay with cash or card). I'm not even sure I could order checks on the account I have, which is a netbank only, no branch offices.

Posted by: platosearwax on March 21, 2006 at 4:18 AM | PERMALINK

> One of the things I noticed first when I
> moved to Norway is that no one, aside from
> the very, very occasional old person at the
> grocery store, uses checks for anything.

You probably also noticed that Norway has some meaningful consumer protection laws. I will start using electronic bill paying when Congress grants that method the same (very weak) protections that paying by check via US Mail provides. Which is to say, when hell freezes.


Posted by: Cranky Observer on March 21, 2006 at 6:59 AM | PERMALINK

On the whole, it's neither a positive or a negative. If you were in the habit of floating checks (secure in the knowledge that you'd receive your paycheck prior to your creditor processing your payment), you won't be able to do that anymore. It's another move toward a cashless money system, just like on Star Trek.

Now, if we could just get Kevin to grow his sideburns in the pointy Starfleet style...

Posted by: Chris on March 21, 2006 at 8:10 AM | PERMALINK

Not long ago, I noticed a finance charge on my Mastercard bill, which was puzzling since I always pay in full. I called, and they said I'd paid a hundred dollars less than the balance. I looked for the cancelled check and couldn't find it -- it had been handled electronically, so I received no record. In this case, the credit card company found the physical check, owned up to the fact that it was for the correct amount, and credited me for the finance charge, but the whole thing made me nervous.

Posted by: Barry on March 21, 2006 at 8:14 AM | PERMALINK

No more float? Whoo, where does that put people like me and my wife when we were first married, trying to survive and raise a kid on about $10,000 a year, and there were times when floating a check meant there was actually food on the dinner table?

Posted by: Bruce A. on March 21, 2006 at 8:55 AM | PERMALINK

I recently started getting electronic facsimiles of my checks rather than physical canceled checks as part of the "Check 21" law. An electronic debit based on a paper check, which Kevin's mom saw, has actually been around a bit longer than Check 21 as noted by a commenter above. My experience is that very few companies do this, which is why Kevin's mother hadn't seen it before - I wonder why some do and some don't?

In 2004 Mickey Kaus thought Check 21 might be a good campaign issue for the Democrats, but I'm not so sure. I haven't seen media reports, blog posts (except for Kaus), or anything else indicating any public opposition. One reason may be that most people haven't gotten their physical canceled checks back for years, "Check 21" or no. For years most checking account statements from most institutions have just included a list of checks processed during the month; depositors have had to pay extra, or call the bank specifically, to get physical canceled checks. That's water over the dam, politically.

Posted by: Richard Riley on March 21, 2006 at 9:25 AM | PERMALINK

This happens to me with my Discovercard, Verizon bill, and Home Depot card. It drove me crazy at first when I was trying to balance my checkbook, but then I went online and could see the checks had cleared.

Now if we can only do something about the "float" the insurance companies get when they hold onto your reimbursement until the cery last second allowable by law... Think the Repugs would be willing to take that one on? I'm guessing, um, not...

Posted by: sullijan on March 21, 2006 at 9:54 AM | PERMALINK

Nobody's mentioned this, but does the person writing a check have any assurance that a one-time transaction doesn't become a permanent database record, complete with all of his bank info? Why do I suspect that the authors and corporate sponsors of "Check 21" gave less than complete attention to privacy issues?

Posted by: sglover on March 21, 2006 at 11:06 AM | PERMALINK

The advantages of Check 21 are all on the side of the bank -- less processing, no courier fees, and the ability to effectively turn merchants into tellers.

The disadvantage, however, is that there is no protection against the re-presentment of your check to another merchant. Do you really believe your check is destroyed when scanned? I only know of one scanner model that does this at the present time. The Fed won't protect you and the bank will push the liability onto the merchant, who will push it onto the consumer. I see Check 21 as the final nail in the coffin of check-writing. It has none of the consumer advantages and invites fraud.

Posted by: Henry Jenkins on March 21, 2006 at 11:19 AM | PERMALINK

Senators and Representatives always have a (R), or (D) or (I) after their names and before the state abbreviation.

Why don't we cut to the chase and list all who have voted for this industry sponsored act and anyother heavily lobbied act with the approriate following:

Sen or Rep Bumbler (W) for WHORE.

Posted by: thethirdPaul on March 21, 2006 at 11:20 AM | PERMALINK

They have stolen the float.

Sold out by a Republican Congress yet again.

Posted by: Russell Aboard M/V Sunshine on March 21, 2006 at 11:22 AM | PERMALINK

Kevin Drum for Son of the Year.

Posted by: ferd on March 21, 2006 at 11:32 AM | PERMALINK

If this is the wave of the future, then evidence rules in state courts need to be updated. I'm a lawyer and I represent clients who are frequently in disputes about whether they paid something or not. A canceled check is golden; it's admissible and proof of payment. But a bank statement? It's not a frivolous thing to worry about how people prove something was paid, because these disputes arise all the time.

Posted by: honestpartisan on March 21, 2006 at 12:39 PM | PERMALINK

I used to have my monthly long distance telephone/ internet bill withdrawn automatically from my checking account. It was a requirement if I wanted a lower monthly rate. When I switched providers, I called my bank to cancel authorization for the old company to have access to my account and was told that I could not do so unilaterally, but that the bank had to hear from the old company as well.

Posted by: Vadranor on March 21, 2006 at 1:33 PM | PERMALINK

I once paid a utility bill with a check rounded up to the next higher dollar amount. They deducted the exact amount of the bill from my account, ignoring what I'd written (digits and words both) on the check. No one at the bank or utility company seemed to see that as a mistake or think that there was anything wrong with it. Now I pay exact amounts, by typing the number into Quicken.

Posted by: Bob Munck on March 21, 2006 at 7:43 PM | PERMALINK



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