Check-Kiters for a Clue

Mickey Kaus is a centrist Democrat, a good reporter, a good writer and an all around smart guy which is why his posting today on the Check 21 law is so revealing of a generalized leftist mindset.

The Check 21 law frees banks from the requirement to keep paper checks in existence after they have been scanned and inputed into an electronic format. The law makes the electronic format the legal equivalent of the paper check for all purposes. Banks are still free to do everything the old fashioned way but the law will no longer require them to do so.

Kaus believes that the Check 21 law could be used by the Democrats to demonstrate how they approach economic issues and regulation compared to Republicans and I think he is right. It demonstrates that Democrats like regulations driven by the ordinary person’s vague and largely emotional understanding of how an economic entity works (in this case banks), substituted for the detailed, market-disciplined understanding of people who work closely with that entity every day.

One line in Kaus’s post leapt out at me:

“It’s hard to believe a law couldn’t have been written that better protected bank customers–by, say, requiring that banks store the original checks somewhere where they could be retrieved in a pinch (even if the checks don’t need to be shipped from bank to bank)”

Like 99% of the population, I use banks but I don’t have any detailed knowledge about how they go about their day-to-day operations. I do, however, understand something about information processes and I can say instantly that Kraus’s casual assumption that managing both the physical checks themselves and the information about the physical checks is a trivial issue is dead wrong. I find it especially revealing that he thinks keeping the checks at the merchants bank would be a simpler task than sending the check back to the customer’s bank.

Think of the problem this way: A bank receives thousands of checks every day. The actual work of banking now is entirely computerized. Once a bank receives a check it inputs the data on the check into its systems, and from then on only the electronic version of the check has any function within the banking system. (Kaus’s assertion that the new law will shorten the kiting period is incorrect. Banks seldom wait to take possession of a physical check before electronically transferring funds to another bank.)

So, now the bank has a slip of useless paper. Kaus thinks it a trivial task to keep track of this paper and store it in such a fashion that it can be easily found and routed back to the person who wrote it in the first place. Not so. First, the bank will need a physical system for the management of the actual paper. Second the bank will need an information system, a type of computerized index, that will let the bank locate the physical check. Third, the bank will need a physical infrastructure to ship the check back to the writer.

Putting the responsibility for keeping the check on the merchant’s bank complicates this process enormously. Think about how you would go about organizing this. The merchant’s bank would get thousands of checks a day written by thousands of individuals against hundreds of banks. You would have to create both a physical file and a database record for each check. The database record would have to contain more information than a bank would need just to identify one of its own accounts, because the check could have come from any bank, anywhere. Requests to produce the physical check likewise could come from many possible sources, all of which would have to be verified before the check could be mailed. Making this a matter of law would also impose liabilities on the bank that they would have to account for.

The old pre-computer system where checks were bundled together by bank of origin and then progressively routed back to the writer is actually simpler from an information perspective. Once the check has been routed and returned to the customer the bank can “forget” about the physical check.

Kaus has only the vaguest notion of the nuts and bolts of how banks handle checks, but he is nevertheless willing to substitute his judgment on how banks work for that of people who spend their entire careers thinking about the problem. Moreover, he is willing to force me to pay for his substitute judgment by forcing my bank to store paper checks whether I personally think that is a useful service or not. He wants to impose his gut-level hunch about what makes for good banking onto me via the power of the State.

It’s the American Left in a nutshell.

4 thoughts on “Check-Kiters for a Clue”

  1. I think we can safely bet that Mickey Kaus never worked for Kelly Girls/Manpower, etc. You don’t have to reach the heights of corporate power to spot anti-productivity regulations.

  2. I was a teller 24 years ago and could never understand why seniors refused direct deposit of social security checks. They told me that they only felt comfortable with a physical check. This is the Kaus reluctance for change. Check 21 settles the legal validity of electronic documents. The next great step we could hope for, is the establishment of a central clearing house for electronic billing, allowing payers to receive all billing to automatically arrive into accounting software with your social security number for routing along with return payment instructions.

  3. What Kaus ignores as you correctly point out is the cost to maintain all these checks. What this must be offset against is the cost to use inferior scanned copies of the check versus originals. And in some circumstances, the scan will be sufficiently inferior to the original that it will cost someone money.

    A good solution would be to add a designator to the MICR line (those funny numbers on the bottom of the check) that indicates if the check or the image should be cleared to the paying bank. Then the users who want the original check could get it or have their bank store it, together with the appropriate, and probably exorbitant, service charge. Those willing to use a scan could do so for a much lower fee. This would allow each individual or entity to make the cost tradeoff for itself with no free riding.

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