Cash Flow in the 21st Century

January 12, 2005—If you don't think that money talks, just consider the recently enacted “Check Clearing for the 21st Century Act.” The passage of this Act was due in part to the 9/11 terrorist attacks. Grounded airlines, bringing check processing to a halt, cost the banking industry billions of dollars.

The Act became law just a few short weeks ago and it is already having a profound impact on the business community. It provides for a new, negotiable instrument called the substitute check that can be exchanged electronically. Electronic delivery means banks will no longer have to fly checks all over the country, and consumers may receive copies of their checks instead of cancelled paper checks. This is in place of the traditional practice of having the physical check change hands between your bank and the payee's bank.

Although the law does not require a bank to use “substitute checks,” you can bet your bottom dollar that every major bank in the nation jumped into the “21st Century” as soon as the sound of the 12th chime of midnight began to fade from their marble floor board rooms on October 28, 2004. Why? Because checks can now clear in a matter of minutes not a matter of days.

Efficiency spawned from technology is what keeps our economy moving forward. So while I'm in favor of automating and speeding up our banking system, there is a major catch of which business owners should be aware. According to the Washington Society of CPA's deposit clearing guidelines regarding the Federal regulations, your receivables being deposited into the bank are not affected by the 21st Century Act. Therefore, while the decreased processing time will reduce the length of time that a check written on your account remains in the check clearing system before being charged to your account, the length of time that a bank holds checks deposited into your account before crediting your account with the deposit will vary depending on your relationship with your bank.

In other words, banks do not have to post payments received on your account as quickly as they can draw them out, essentially translating into a banker's float. Think of the trillions of dollars instantly drawn from payers, but not so instantly posted to payees' accounts. And your already tight cash flow just got a little tighter.

Banks have never been required to return original checks to commercial clients, but the new legislation does not specify what must be returned to the customer. That decision is left up to the bank. For instance, a bank may simply send a monthly electronic list of checks and the dates they cleared with links to the electronic check image. However, a customer can require the bank to return a “substitute check” if the customer has a need for a legal equivalent of the original check.

Because of the range of delivery options, understanding what a financial institution will return should be a top priority for auditors and corporate management. Since the legislation specifically allows for substitute checks to have all the force and effect of an actual cleared check, auditors may use a substitute check as evidential matter. In certain cases, an electronic check image will suffice, depending on an auditor's assessment of the fraud risks. Regardless, audit procedures may be affected. Likewise, management must fully understand how their bank will handle transactions so that internal controls over cash can be revised if needed.

While the Act is voluntary, most banks are expected to take advantage of potentially significant cost savings and the added float. Look for the larger institutions to lead the pack with other banks following in the next few years.

To learn more about the Check Clearing for the 21st Century Act, go to www.federalreserve.org. And be sure to get your banker to sit down and explain what all this means to you and your business…maybe over lunch. I think he can afford to buy.