New Banking Legislation Alert

This legislation was passed primarily in response to the grounding of the nation's air carriers after the 9/11 disaster, and the resulting delay in the transfer of checks between financial institutions.  To ensure that the banking system would never again be subject to this kind of disruption, Congress passed the Check 21 Act, allowing banks to transfer funds using electronic facsimiles of checks.

As of October 28, 2004, banks can now use a substitute check based on electronic facsimile.  This allows banks to transfer funds instantly between the account on which the check is drawn and the account into which it is deposited, without the original paper check ever changing hands.  The result is that companies can no longer rely on the "float" factor that paper checks have traditionally provided.

On the plus side, once you deposit a customer's check, those funds will be available in a matter of hours.  On the minus side, the checks you write to vendors will also clear in a matter of hours, so you can no longer factor in the float in managing your cash flow.  This will require you to monitor cash balances more frequently and to time your payments more carefully, especially when large bills come due.

Although the Check 21 Act enables banks to use substitute checks, it does not require them to do so.  Check with your bank to see where they stand on implementing the provisions of the law.  If cash flow will be a greater variable, you may wish to consider alternative bill payment methods, e.g. credit cards, that can reduce the number of checks written and help restore some measure of financial control.