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Consumer Reports

New law turning all paper checks into electronic copies | (KRT) The "Check Clearing for the 21st Century Act" - nicknamed "Check 21" and expected to transform the U.S. check-processing system - seems to be passing its way through Congress largely unnoticed.

Within the next month, it will likely be sent to President Bush for his signature. By fall 2004, actual checks with originals of your own John Hancocks will start disappearing from your mail - if you're still getting canceled checks returned with your bank statements.

Instead, you'll get "substitute checks": reprinted images of the check you wrote. They'll bear great resemblance to the real thing. Each will say, prominently, that it's "a legal copy of your check," usable for record-keeping or evidence "the same way you would use the original check." But they won't quite be the real thing.

Should you worry? I put that question last week to officials at the Federal Reserve. The Fed helped craft Check 21. With the financial industry, it's a driving force behind it.

The Fed's main message to consumers: Things change as technology changes, and that includes the nation's payment system. As long as consumers aren't harmed, even the technology-shy will learn to adapt.

They say the new system is being designed to protect against mistakes and criminal mischief, and its efficiencies will outweigh any drawbacks. In the end, consumers will come around.

"They don't so much care what's under the plumbing of the payment system, as long as it works smoothly," says Jack Walton, assistant director of the Fed's Division of Reserve Bank Operations and Payment Systems.

Here are a few questions and answers about how the new plumbing will work, and what happens if it leaks:

What will be different?

Right now, a typical check passes through eight to 12 steps of human or mechanical processing as it wends from your checkbook, into the banking system, then back to your hands.

The new system is called "check truncation" because it cuts short the original check's life span by converting it to electronic form. If a paper version is requested at any step - by you, or by a bank unable to handle electronic checks - a substitute paper check can be created.

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"The beauty of this law," Walton says, "is that it reduces the amount of physical handling and processing of the paper check. Once it's truncated and converted electronically, it zips through the system and pops out at the other side, if you want a printed check."

Q. It's legally equal to the original?

A. Yes. The substitute check has all the legal standing that your canceled check now does.

Q. What happens to the one I wrote?

A. It's up to the bank, but it will probably be destroyed within 60 days.

Q. Will it add to risks of forgeries or identity theft? And what if an electronic check is duplicated and I'm debited twice?

A. Banks will have a major incentive to be at least as cautious as they are now, because of specific warranties written into the law, Walton said.

The main one is that they'll be on the hook for both actual and "consequential" damages if money is mistakenly or fraudulently taken from your account. Your bank won't just have to refund it. If there's a cascade of events - say, you bounce a check to the utility, your power is cut off, and your pipes freeze, all because of a wrongly debited check - the bank will be responsible for it all.

Q. That sounds easy. Is it?

A. Not easy, but no harder than today. "Right now, you can go in and say, `Listen I didn't write this check,' and your bank may or may not believe you. You might have to go to court," Walton says. That won't change under Check 21.

Q. Are there other protections?

A. Yes. Just as they do now, banks must meet certain standards if a depositor says funds were wrongly taken. They're obligated to recredit amounts up to $2,500 within 10 business days, and larger amounts within 45 calendar days.

Check 21 puts a special burden on the bank that created the substitute check. If you suffer a loss because you received one rather than your original, that bank is responsible.

Q. How does that work?

A. Say there's human error in the photo-imaging process and your signature is obscured on the electronic record of the check. If the signature is crucial to making your case that a check is a forgery, the bank that created the substitute can be held liable for your loss. It then could go after the bank that erred in the imaging.

Q. This all sounds so complicated. Is it?

A. No more than the system now. About 40 billion checks are processed each year. Even with an error rate of less than 1 percent, there are still probably hundreds of "millions of checks that cause trouble. And many of those problems are blamed on the mishandling of paper.

Walton says Check 21 won't change that instantly - the new procedures will be phased-in as banks are ready to adopt them. But it clears the way to a system where checks will essentially become paper-electronic hybrids.

In the long run, the Fed says, we'll all benefit from the reduced costs.

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© 2003, The Philadelphia Inquirer Distributed by Knight Ridder/Tribune Information Services