San Antonio, U.S., Banks Phase Out 'Floating' Checks

San Antonio Express-News

Roy Bragg

January 10, 2004

Jan. 10--For generations of Americans, the "float" has been an integral part of their financial solvency and their pursuit of the American dream.

Checks for rent, groceries and car notes had to be physically carried from point to point -- from the grocery store to the grocery store's bank, then to a central check clearinghouse, and finally to the shopper's bank. After all of that, the money was deducted from the shopper's checking account.

That travel time, sometimes up to a week or more, was "the float." It allowed people to pay bills even before they had money in the bank to cover them. Technically, that was illegal, but millions of families avoided billions of dollars in late payment fees.

Memo to Americans still living hand to mouth: The float is going under.

Last year, according to an American Bankers Association study, plastic overtook paper as the dominant form of retail payment.

In that study, cash and checks combined for 47 percent of in-store purchases, vs. 51 percent in 2001. Credit and debit cards, on the other hand, made up 53 percent of last year's in-store sales, up from 49 percent in 2001.

While electronic payment takes over the cash register, it's just the opposite for the monthly ritual of paying bills. Americans still prefer the ritual of cutting a check over electronic bank transfers and online bill paying.

"It's declining, but it's still dominant because it's a system that still works," said Leon Majors of ESP Consulting, a Salisbury, Md. research firm that studies payment systems. "The key features of that system are that it gives consumers privacy, security and control over when the bill is paid. Well, that's what they want."

But on the retail side, instantaneous payment systems will soon take over the point-of-sale industry, says John Hall, a spokesman for the American Bankers Association.

"It's all about consumer choice and convenience," he said. "Consumers like using plastic because it's faster, it's safer and it's convenient. It's faster than writing a check, and it's safer than walking around with a lot of cash."

But the check isn't going alone. It's taking the float down with it.

"There won't be any more of (the practice of) writing a check to the electric company on Wednesday, mailing it on Thursday and it not clearing your bank until Monday," Majors said.

The drive for real-time transactions promises to cut costs for banks, make life more convenient for consumers and eliminate much of the theft and fraud that's long been part of check writing.

But it's also creating uncertainties for law enforcement, which relies on pre-Information Age laws to enforce theft statutes in an increasingly digital world. And it's not going to help young and low-income families, many of whom rely on the float to keep their household books in the black.

More than 12.7 million households don't have a checking account, Majors said, and of the ones that do, more than 25 million don't have enough money in there to meet their monthly obligations when they're due. For them, the float is a vital part of making ends meet.

The check began as a substitute for currency four centuries ago. The first checks were written in Holland in the 1500s. The first U.S. checks were written in 1681 by Boston merchants, using their land to "back" the check amounts.

For years, checks used by consumers were bank drafts carried by each merchant, almost an IOU. As America grew, it grew more dishonest. Forty years ago, stores and banks realized they couldn't afford to be so trusting, giving birth to uniform adoption of personalized check pads.

Checks became American's de facto currency. Banks processed 42.9 billion checks in 2001, valued at a total of $39 trillion. A 2002 Federal Reserve study reported that the average check is written for $925.

Consumers write half of the nation's checks, while businesses write 32 percent. Government and other entities write the remainder.

Relying on checking accounts was fraught with pitfalls for banks and merchants. Thieves, armed with stolen checks or fake identification cards, or both, could bilk stores for billions annually.

Or consumers, only half of whom balance their checking accounts monthly, could make mistakes or simply overdraw on their account. That's why more than 251 million checks, with an average value of $701 each, bounce each year. Electronic payment eliminates that.

Locally, Sandra Ruedrich of the Bexar County District Attorney's Hot Check Division says that merchants are reporting fewer and fewer hot checks since 1999.

In 2001, her office processed 80,544 bad checks. By 2002, it had dropped to 73,902.

While some of that is attributable to the downsizing in the local retail scene, a lot of it has to do with electronic transactions.

Debit card systems are linked directly to a buyer's checking account, and thus eliminate the possibility of an overdraft.

Credit cards, if used haphazardly, can create mountains of debt, but none of it comes from consumers' checking accounts.

That's important if the card is lost or stolen, says Rob Schneider of Consumers Union. Currently, there aren't liability limits on many debit cards, unlike the standard $50 limit on credit card loss.

A stolen debit card that isn't tied to a personal identification number, such as a Visa bank card, can be used to empty the victim's checking account.

While they're less secure, checks offer consumers more protection, Schneider says, because they create a paper trail. Checks are considered legal instruments and can constitute legal proof of a disputed payment.

But three new developments on the horizon, while pumping life into the printed check and making the system safer, are also threatening checks' unique legal status and safety net.

First and foremost, Majors said, is Check 21, a federal law passed late last year. It lets banks forgo the physical transfer of checks from bank to bank.

The law creates a new legal document called "the substitute check," which is a certified digital copy of both sides of a check. Beginning in October, banks will be able to digitize checks and send them electronically to the writers' bank, thus eliminating a little more of the float.

While Hall hails it as a major development to make the system work better, Majors says it's a potential nightmare.

Once the account has been credited, Majors said, consumers won't be able to count on their canceled checks as legal proof of payment.

The law hasn't been taken to court yet, but Majors believes a challenge is inevitable given the heretofore-distinctive legal status of a canceled check.

Ruedrich, who advised state legislators on check-writing law, says Texas law still contain the financial version of habeas corpus -- the state can't prosecute a hot check writer without the smoldering check in question.

Other new systems are also helping to capsize the float. Many retailers, including Wal-Mart, have installed an "e-check" system that automatically reads a customer's check and converts it to a digital transaction.

And many companies are adopting Accounts Receivable Check Conversion systems that do the same thing that e-check verification systems do at the checkout counter.

Those systems, like Check 21, don't leave an auditing trail. But Hall calls systems like the e-check and Check 21 part of the inevitable advance of technology.

Credit cards were once rare, but have become commonplace as technology -- electronic transfers vs. carbon copies, for example -- has made them safer.

"Checks will be with us for many years to come," Hall said. "-- Checks have a smaller piece of the payment pie, and that piece will continue to shrink. But consumers will always have that option."

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(c) 2004, San Antonio Express-News. Distributed by Knight Ridder/Tribune Business News