Bankers say law will cut their check costs.

Each year, banks spend an estimated $70 billion processing and shipping checks at originating banks or Federal Reserve branches.

The system, which can be responsible for waits of several days before the money becomes available to depositors, is about to get a major upgrade.

A new federal law will allow banks that are presented with checks to scan originals into their systems and discard them, eliminating extra time, labor and cost.

The law, known as "Check 21," goes into effect on Oct. 28 and is being tested this summer at local banks. It is expected to radically alter the way checks are processed in United States and produce massive shifts in the micro-economy that's grown up around check processing--eliminating the need for the acres of storage space, for example, banks now purchase or rent.

Critics, however, say it could make check forgeries easier to pull off without the originals.

"Check 21 is not very good for law enforcement because it reduces our ability to collect evidence," said Jim Gaughran, international president of the International Association of Financial Crimes Investigators, a trade group made up of fraud investigators. "People who are involved in white collar crime will know that this law goes into effect and there won't be evidence available."

Eliminating paper checks, he said, will limit investigators' ability to retrieve fingerprints because the physical check will be gone. "We may see a shift back to checks, rather than credit card fraud, because there won't be any primary evidence to convict," he said.

But Ed Higgins, first vice president of check services and image strategy at Comerica Bank, said the new way of processing checks will actually allow businesses to detect fraud faster because customers could receive scanned images of checks daily, rather than monthly, allowing them to react faster.

Industry support

The Check Clearing for the 21st Century Act passed swiftly through Congress last year, with the support of the banking industry and President Bush.

The bank lobby was spurred to action in the aftermath of Sept. 11. 2001, when airplanes were grounded nationwide for five days and millions of checks sat in cargo planes on runways, unable to be processed.

"Our financial system was particularly vulnerable," said Jo Ann Bourne, executive vice president of Union Bank of California. "Checks around the country could not be cleared until the airports opened up."

The key feature of the law is that it establishes an electronic substitute for the actual check.

Currently, as many as 10 people handle a check from the time it is written until it is either mailed back to the customer or put into storage. Shipping costs, via overnight mail or armored cars, run to $2 billion a year alone.

Under the new law, an electronic image of the original paper check, called an image replacement document, can be created by the depositor's bank and sent through a network operated by the Federal Reserve.

Under the new law, banks must accept substitute checks, train their employees to process them and notify customers of the changes. The Check 21 Act does not require any bank to create substitute checks, but some banks plan to go beyond the minimums by offering business customers the ability to scan checks into the system.

Many banks already have the technology. Some originating banks, for instance, scan checks they receive and send only copies back to their customers with their bank statements. Now originating banks won't ever receive many of the actual checks, so customers who are used to receiving the originals with their statements won't see many--if any at all.

Wells Fargo and Union Bank both plan to offer scanning devices--now being tested--allowing large customers to make electronic deposits. Banks have even worked out the legal details that will shift liability for processing checks correctly onto business customers that transition to electronic scanning.

The time it takes to clear a check also will plummet to as little as a few hours, from the current two- to five-day waiting period, wiping out the "float" that critics complain some financial institutions use to their advantage.

"This law is one of the most significant things that's happened in the banking industry in the last 20 years," said Sanjiv Sanghvi, executive vice president of treasury management at Wells Fargo & Co. in San Francisco. "Instead of having employees spend 20 minutes to 40 minutes a day depositing checks at their bank, (business customers) can do it from their desk top."

Large banks have formed partnerships to facilitate the electronic exchange of checks and push for wider acceptance in the banking industry.

One venture, SVP Co., is controlled by 22 of the largest banks in the United States, including Citibank N.A. and JP Morgan Chase, Wells Fargo, Bank of America and several others with a large presence in California.

The new system is also expected to save money for the Federal Reserve, through which about one-third of the 42 billion checks processed annually in the U.S. are routed. The cost of this processing reduces the amount the Federal Reserve can turn over to the Treasury Department each year.