Once upon at time in the United States of America, there were small rectangular pieces of paper called checks. Officially, a check was
"A negotiable instrument drawn against deposited funds, to pay a specified amount of money to a specific person upon demand." Paper checks were numbered, bound in books and issued by banks. Before issuing checks, banks required customers to set up a
checking account and deposit money in it.
Many citizens used checking accounts as the primary place to store money because they were safer than storing cash in homes and they were a more flexible way of paying for something than always carrying cash. When using a paper check, the bank customers would fill out the check with the amount owed; sign the check; and present it to a vendor as payment for goods/services. The vendor would accept the check as payment and
deposit it into the business' account at the bank. At that point, the business' bank would send the check and a payment request to an intermediate bank. The job of the intermediate bank was to verify and settle the check. To do that, the intermediate bank used the
routing number from the check to identify the paying bank. After the paying bank was identified, the original check and the payment request were sent to the paying bank (the customer's bank). When the paying bank agreed to honor the check, it was considered verified. Once verified, the intermediate bank settled the check by
debiting the customer's bank and
crediting the business' bank. Finally, the customer's account was debited by the paying bank and the vendor's account was credited by the business' bank. At the end of the month, the customer that wrote the check received the original paper check in the mail with a written account statement. This was a very long path that the paper check had to travel!
For a time, paper checks were good. They made the lives of the citizens easier. The banks charged the citizens for managing their checking accounts; the citizens
floated their checks before the money would actually disappear from their accounts; and vendors enticed customers to buy their goods and services because they were willing to accept their paper checks.
After many years,
credit cards emerged as a new way to pay for goods and services. Unlike paper checks, credit card accounts did not require money to be in an account to cover charges for goods and services. Instead of writing a check, citizens began to present a credit card as payment for goods and services. The vendor charged the amount owed to the credit card account and received money from the credit card company as payment. Eventually, the citizens had to pay the credit card company back. Because these credit card accounts did not demand money to be in an account to cover purchases, citizens could purchase goods and services with money they would eventually have rather than with money they already had.
Credit cards became so popular and convenient that banks were losing customers and money. Citizens were just not writing as many checks as they had in the past. Now, they had an electronic way to pay for things. Still, some citizens did not want to use credit cards but they did not want to carry cash or checks with them all the time either. For those citizens,
debit cards became an option. Debit cards were an electronic version of a paper check. When a customer presented a debit card to a vendor as payment, the vendor was able to send an electronic payment request to the customer bank and their checking account was debited almost immediately. While this was a much more convenient way to pay for things, it meant that, if electronic payments became popular, the citizens that had been paid to process the paper checks might lose their jobs.
For awhile, electronic payments were an option but the most payments were still being made with cash and paper checks. Then, it happened! The bankers in the USA announced that MORE payments were made with credit and debit cards than with cash and paper checks. Most citizens didn't even notice the announcement. Paper checks were definitely in trouble! Did this mean they would go away completely?
When bankers saw that more people were using electronic checks, they talked to the people in the government that made decisions about the banks and how they operated. The lawmakers passed a new law dealing with paper checks. The law, called
Check 21, meant that banks did not have to keep up with the original check and return it to the customer that wrote it. This law let the banks make electronic copies of the check and send them to the banks to verify and settle payments. The bankers and the lawmakers said that it would make check processing faster and more accurate and that the bankers might not lose as much money from customers that were writing
"bad checks".
But what did Check 21 mean for the citizens that were actually writing the checks?
- They might bounce more checks because the money was deducted from their account faster and they would not have time to "float" a check
- They might not recognize some of the things they saw on their checking account statements
- They might have to pay the bank more fees to have their checks processed electronically and/or substituted
- There would be limits on the protection against errors that a bank or vendor might make in processing the check electronically
- They might write a check and find that it is processed as an electronic funds transfer instead of as a check (and it would be legal for the bank to do that)
- They would find it more difficult to stop payment on a check
- Proving fraud or forgery would be more difficult on a substitute check
When the new law went into effect, many citizens didn't even notice. Many more didn't understand the new law. Why did it happen? It saved the banks more money and it helped the check processing procedure take advantage of technology.
For awhile, the banks were busy learning to to handle the new law. By the time they were ready to start processing checks the new way, most citizens were thinking about something else. A couple of years after the law went into effect, fewer paper checks were being written than EVER before! Indeed, citizens that had been paid to process the paper checks
lost their jobs. Some citizens even said that paper checks would disappear altogether.
When the lawmakers asked, they were
told them that the new law was working. Some citizens made money by writing programs that helped the bankers with the new law. Fewer and fewer citizens wrote fewer and fewer paper checks. The bankers started thinking about the next changes they wanted to make to banking. Paper checks did finally go away and all the citizens of the USA lived electronically ever after!
