What does electronic checking mean for your practice?

When the Check Clearing for the 21st Century Act, or Check 21 as it is called, was signed into law last fall, few veterinarians noticed.

Check 21 modernizes the U.S. payments system by making it easier for check images to be transmitted electronically. The new legislation provides for the creation of a new negotiable instrument, the substitute check, which will facilitate electronic presentment of checks.

Imagine! Soon every veterinary practice will be able to submit an electronic image of all checks received, rather than the physical check, to their bank. The bank, for its part, can also rely on that electronic "substitute" check or its own electronic image for almost instantaneous transmission to the clearing bank.

The new law also ensures that those who do not wish to accept electronic images can receive a paper check. In other words, not every veterinarian will use substitute checks to electronically transmit payments for collection but they have to accept them should others use them.

With widespread use of credit cards, debit cards and online payment plans, paper check usage already has been dropping significantly. Remember, however, that although this year was supposed to be the first year that electronic financial transactions will outnumber check transactions nationwide, Americans still love to write checks. It's inefficient, it's costly, but it is still popular. Now, we have Check 21.

Winds of change

It is unlikely that many veterinarians will immediately take advantage of the new Check 21 legislation. However, every veterinary practice, especially those that receive or help generate a share of the 42.5 billion checks that are processed every year, may be in for a number of surprises -and may reap a share of the savings expected to result from Check 21.

Check 21

When Check 21 takes effect in October 2004, images can be substituted for the paper checks everyone is familiar with. The substitute check or image can be transmitted electronically rather than physically deposited. The use of electronic images for check processing will not be limited to banks and other financial institutions.

In fact, many veterinarians will also be able to take advantage of this new, faster and cheaper system for processing and collection of checks. Naturally, not every veterinary practice, nor even every bank, will immediately choose to invest the funds necessary to image and store these documents. But everyone, whether using these official image replacement documents (IRDs) or not, will feel the effect of this simple legislation that opens the door to a list of innovations.

Initially, many veterinarians may not know which banks are using substitute checks or which are not. Therefore, they must assume there will no longer be any "float" to depend on. The consumer, a businessperson or a veterinarian, who is used to writing a check on a Wednesday to be covered by Friday's deposits, will be out of luck. That check could clear as fast as Wednesday night.

The Check 21 legislation legalizes the use of digital images of checks as IRDs enabling veterinary practices and their banks to convert a paper check to digital format. The electronic image file of that IRD becomes the legal version of the check.

How it will work

By October 2004, when the law takes effect, many banks and even a few veterinary practices will be able to scan any check-business or personal-and transmit the electronic file to the paying bank and burn the paper version. It will also be possible for veterinary practices to convert from paper check to digital check prior to deposit. A veterinary practice, for example, will be able to truncate checks when received and transmit only the digital images to the bank where they normally make deposits.

Banks will be able to present the digital version of a check for payment anywhere nationwide within seconds. Clearing float will disappear. Settlement will, of course, accelerate. And the bank's cost and risk of physically transporting checks will evaporate, as may some of the security devices embedded in the check stock.

According to many experts, the early truncation of paper checks-a goal pursued for decades by banks and other large payment processors--will probably not be accomplished in one wave. The new law does not mandate the truncation of checks. Depositing banks that want to continue clearing paper checks will be able to do so. However, Check 21 does mandate that paying banks accept the digital images of checks, so all banks of first deposit will have a license to truncate if they so choose.

No one, not even check-writing veterinarians or their practices, will be able to opt out. Banking industry experts predict that clearing images instead of paper checks will save enough time and money that banks will eventually truncate virtually every digital check.

Most veterinarians, however, will not need to scramble to get ready. A lot will depend on how quickly the big banks that dominate the check clearing business decide to switch over to image presentment. The full effects may take years to show up.

Lawmakers claim that there are many consumer benefits that will result from Check 21. Under the current system, for instance, banks are limited in their ability to place ATMs in remote locations because any checks deposited at those machines must be picked up and transported on a daily basis. Under Check 21, which should, according to lawmakers, encourage banks to place ATMs that scan digital checks and electronically transport them in geographically remote locations.

Upside/downside

With a greater number of checks imaged and posted on the Web site of a bank, more customers will be able to review their accounts on a new "real-time" basis, enhancing fraud prevention and consumer convenience.

The "float" time, the period between when a check is drawn and when the funds are actually withdrawn from the checking account, will be almost eliminated. Banks will send longer statements but return fewer canceled checks thanks to the new digital imaging.

Under Check 21, if a veterinary practice or a consumer needs the actual check, a substitute check can be printed. However, either the practice or the bank can be held liable if a substitute check is created without all of the necessary information. Bank customers who like getting their checks returned to them each month would likely receive the substitute checks instead.

Unfortunately, Check 21, the new substitute check system, also raises some red flags. This is going to open up a whole new avenue for fraud. With imaging equipment so readily available, it would be easy for a criminal to replicate a substitute check. What's more, banks would have a difficult time identifying a fake because it would not carry the marks of a financial institution that processed the check along the way.

Some of the security features embedded in paper checks are expected to survive truncation.

Security

Check-printing vendors are already working with banks to see what can be done to maintain safety features. Depositors should see big gains in security. They will find out much sooner about counterfeit, altered or bounced checks and better able to receive funds when checks bounce.

Bank customers will have 40 days following the issuance of account statements to register claims against alleged improper charges. Banks must investigate all claims within 10 days of receiving a claim, or credit the customer the full amount of the improper substitute check, pending completion of the bank's investigation.

Legal action also could be affected by truncation. Court battles over alleged check forgeries will have to be argued using the electronic image file because original checks will have been destroyed in most cases.

Another potential problem facing veterinarians, their practices and their banks is the lack of guidelines on how long these substitute checks or images must be kept.

It is not clear whether Check 21 heralds the long-promised coming of a checkless society. The new law does provide an effective push toward doing away with paper checks and forcing all payments to start out electronically.

On the other side of the coin, however, many experts predict that Check 21 will actually prolong the life of the paper check as a disbursement strategy. Many veterinary practices use checks because of internal reporting and audit concerns. If truncation makes checks cheaper and more reliable, the incentives to discard them as a payment method will shrink.

Every veterinarian should give a great deal of consideration to Check 21. There are opportunities to use these unique substitute checks to speed up payments. There is also the matter of coping with substitute checks used by your bank. An awareness of the possibilities, the protection afforded every veterinary practice and its principals under this new system, will go a long way toward helping you, and your practice profit, from Check 21.

Mr. Battersby is a financial consultant in Ardmore, Pa.