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The Check-Clearing Quagmire

Soon, it won't take a week to clear a check.

If companies can move millions of dollars in electronic instants, how come it still takes a week for your Manhattan bank to deduct $22.89 from your account after your cousin in L.A. deposits the check you sent? Answer: His bank has to fly the slip of paper cross-country to your bank so clerks there can look it over. The process isn't just ridiculously costly. It almost brought down the U.S. financial system. After September 11, when air traffic was halted, planes couldn't fly checks, so checks couldn't clear. The Federal Reserve had to pump billions into the banking system to keep it going.

Checking will finally enter the digital era on October 28, when the Check Clearing for the 21st Century Act takes effect. "Check 21" makes it legal for banks to send one another digital images of checks instead of the rumpled originals. It's a screaming no-brainer: Steve Ellis, executive vice president for wholesale services at Wells Fargo & Co., says zapping electronically will cost about 20% to 25% as much as processing the small chunks of dead trees. But Check 21 won't necessarily help consumers. The laws still allow banks to keep long holds on funds from checks you deposit, even if those checks now clear within hours.

A version of this article appeared in the October 2004 issue of Fast Company magazine.