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Check 21: Customer Education Pays Off for Community Banks Glastonbury, CT
By Rocco A. Magnotta
With so much written and discussed about Check 21, it's often difficult to separate fact from fiction. Managers of most community banks understand that the federal legislation, formally known as the Check Clearing for the 21 st Century Act and scheduled to take effect on October 28 th , will allow them, over time, to embrace a more efficient check collection process by reducing costs of check processing equipment, staffing, and transportation. Yet in the short-term, it will likely have a minimal effect on the way they process their checks.
Customers of community banks, however, may not be as well informed about this legislation. They hear bits and pieces about Check 21, but they probably don't have the full story. Some may fear that paper checks will disappear for good! As October 28 th draws closer, customers of community banks will be asking more questions.
Preparing for the coming of Check 21 is analogous to the preparations for Y2K. Spurred by mandates from the federal government, community banks did an excellent job of keeping customers informed about their Y2K plans. It allowed community banks to demonstrate that they were up to speed on technology and showed that they were every bit as prepared as the mega-regional and non-financial institutions.
Check 21 offers community banks a similar opportunity. While customers initially may see few, if any, changes when the legislation first takes effect, community banks can position themselves as sources of information and take the lead in educating customers. Maintaining a defensive posture or sidestepping questions about the legislation does not resonate with customers, who may see such a bank as behind the times or uninformed.
While there are federal mandates for informing customers about Check 21, community banks should be proactive in their efforts to educate customers. Giving customers all of the facts will alleviate any fears and maintain the high level of trust that exists between the community bank and its customer. That means starting now.
Check 21 requires banks to distribute a substitute check notice describing the substitute check and disclosing the recourse available to consumers who allege a loss because a substitute check was provided to them rather than the original paper check. The law requires banks to distribute this notice as part of its first regularly scheduled contact after Check 21 takes effect on October 28 th . However, community banks shouldn't wait. Why not let customers in on what's taking place and what the bank is doing to prepare for the change? Community banks should go beyond the minimum requirements and include letters to customers fully explaining the legislation and describing the changes that they will see or experience.
By focusing on the impact to their customers, community banks demonstrate that they understand customer concerns and how the regulations directly impact them. Here are some points that should be addressed to consumers.
1. Check 21 reduces processing time. Check 21 will allow banks to reduce the risks, time, and costs associated with paper check processing and transportation. Instead of relying on physical transportation via plane or truck, banks may remove paper checks from the collection process and replace them with substitute checks created from digital files. Banks can then send the images electronically.
Of course, reduced processing time can also speed up the timing of the withdrawal of money from the check writer's account. This factor will impact those customers who write a check on Wednesday and expect that a deposit on Friday will cover the float. They will have to change their habits. Although such a practice was never legal, Check 21 will effectively preclude it. This result of Check 21 should be explained as well.
2. Check 21 streamlines the process. Customers do not have to change what they do. Banks and their customers must simply be prepared to accept substitute checks if such checks are received by the forwarding bank.
3. Check 21 gives consumers rights. If a check is paid twice, paid for the incorrect amount, or otherwise paid in error, the customer has the right to have the funds recredited to his or her account within 10 business days, provided that a substitute check was used. At least $2,500 must be recredited within 10 days if the amount in dispute is larger than that amount. Up to the full amount must be paid after the 45 th day of the claim. Consumers will be entitled to this right under Check 21 only when a substitute check is involved, meaning that they will not receive the benefit for all electronically-processed checks.
Because a community bank's employees, especially tellers and platform staff, interact with customers so often, they should be fully apprised of Check 21. The FDIC recommends that institutions update policies and procedures and reevaluate employee training. A Check 21 fact sheet to explain the basics of the legislation and its impact on customers when they write checks and receive their cancelled items will help employees better understand the legislation. A briefing that allows employees to ask questions is another suggested step to increase their understanding. Training employees to recognize and accept substitute checks is also important.
Check 21 is part of a larger technological revolution that has changed banking over the past 25 years. Change can be difficult and costly. Many customers don't react well to change and may even resent it. But community banks that embrace change and take the time to educate and inform will ultimately be seen by their customers as forward-thinking institutions that are looking out for them.
Rocco A. Magnotta is the Bankers' Bank Northeast's Vice President/Relationship Manager for New York and southern Connecticut. Before joining the Bankers' Bank Northeast, he was Senior Account Manager in the Federal Reserve Bank of New York's business development office. He was a 37-year employee of the Fed. The Bankers' Bank Northeast is based in Glastonbury, CT and provides correspondent products and services to over 125 community banks throughout New England and New York. The Bankers' Bank Northeast is a state-chartered wholesale banking institution that is FDIC insured and a member of the Federal Reserve System and the Federal Home Loan Bank of Boston. He can be reached at firstname.lastname@example.org.