How Check 21 Will Impact Your Business

3 ways the banking act will affect entrepreneurs

By Chris Kelleher

Opinions expressed by Entrepreneur contributors are their own.

It's the biggest change in banking law in years, and it will eventually have a big impact on your business. Yet no one seems to know much about it.

I'm referring to Check 21 (short for the Check Clearing for the 21st Century Act), and it's coming to many banks and even some businesses on October 28, 2004.

In a nutshell, Check 21 allows banks to replace paper checks with a digital copy of the check, called a substitute check. Once a paper check has been transformed into a substitute check, the bank will then be able to process the substitute check image literally at the speed of light rather than taking days to physically haul a paper check from one bank to another to another.

While Check 21 is at this time optional and not mandatory, it doesn't take a Wall Street wizard to see that it will eventually have a big impact on every business in this country. Here are the top three ways that Check 21 may impact your business:

Impact #1: Check 21 will bring about the death of "float." Float is the wonderful (or terrible, depending on your viewpoint) result of the lag time between when a check is first presented to the first bank for payment and the time that the original bank finally withdraws money from the particular checking account to cover the check.

One common example of how businesses use float is this: If a business hands out paychecks late Friday afternoon, it knows that it won't have to deposit money into its payroll checking account to cover the paychecks until at least Monday, if not later.

But Check 21 will drastically reduce the time it takes for a check to be processed, from days to hours or even minutes. At least in terms of timing, using a substitute check under Bank 21 will eventually result in a total transaction time almost as quick as using a debit card.

A word to the wise: Watch your checking account balance when you write a check very carefully from now on. Float is going the way of the 8-track tape.

Impact #2: Businesses that receive a large volume of their payments by check will greatly benefit from having a remote deposit terminal at their business location. This allows the business to transform a paper check into a substitute check and send that digital substitute check zipping through the bank processing network at the speed of light.

For example, let's say that a dry cleaning store currently accepts paper checks in payment. If the store installs a remote deposit terminal at its front desk (along with its debit and credit card terminal), the store can transform a customer's paper check on the spot into a substitute check and, presto, the check immediately starts the bank clearing process without the store having to physically deliver the check to a bank.

Another word to the wise: If your business accepts a large volume of checks, you should talk to your bank about getting a remote deposit terminal sooner rather than later. The money and float you save will be your own.

Impact #3: Lots of confusion. Lots of bounced checks. Let's face it: People and businesses don't respond well or quickly to massive systemic changes in our financial system. (Just look at how well the $2 bill and the Susan B. Anthony dollar coin fared.) We are so used to float, and we love paper checks so much, that implementing Check 21 is bound to be a slow-and, for some people, even painful-process. My guess is that before people and businesses finally learn that "float is dead," Check 21 will result in a large number of unintentionally bounced checks.

One last Check 21 tip: Just make sure your business isn't the one bouncing checks like an over-inflated basketball.

Note: The information in this column is provided by the author, not All answers are general in nature, not legal advice and not warranted or guaranteed. Readers are cautioned not to rely on this information. Because laws change over time and in different jurisdictions, it is imperative that you consult an attorney in your area regarding legal matters and an accountant regarding tax matters.

Chris Kelleher

Chris Kelleher is an award-winning small-business advisor and attorney. He's also a sought-after speaker and the founder and resident legal guru of The Law Firm For Businesses, a boutique law firm that helps business owners creatively solve their business and legal problems.

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