Buried in shoe boxes under beds and in closets of Americans everywhere lie fresh casualties in the war between banks and mutual funds.
We’re talking about canceled checks–relics of a banking ritual that is about to bite the dust.
Following the lead of their money-fund competitors, banks across the country are scrapping their tradition of returning checks free. Customers receive only monthly statements, but can get a copy of the occasional canceled check by request, often for a small fee.
This policy, called “truncation” or “safekeeping” in banker talk, has been standard practice by non-bank rivals, such as money funds, credit unions, and savings and loans. Now more banks are catching on to the strategy, hoping to slash postage costs and pump bigger profits from depositors.
More than 41 percent of banks offer some accounts that don’t return original checks, up from 33 percent in 1993, according to Sheshunoff Information Services Inc., an Austin, Texas, firm that tracks the banking industry.
“Banks are seeing the benefits of safekeeping, and trying to encourage their customers” to go without getting checks back, says Louise Clynes, director of retail applications at the National Automated Clearing House Association, a Herndon, Va., group of 14,000 financial institutions that promotes automated payment systems. A bank might pay 50 cents or less in postage and processing to mail out a statement only, against as much as $2 to send canceled checks along, too, she says.
But this move could backfire if fee-weary bank customers flock to money-funds and other rivals. Once people no longer value or expect the familiar banking service, they are bound to ask: Why use a bank?
Banking fees have shot through the roof in recent years, prompting depositors to look for better deals elsewhere. Many have turned to brokerage houses that have so-called asset-management accounts with bank-like services, including unlimited check writing, direct deposit, debit and credit cards, and automatic bill payment.
Still, some investors with these brokerage accounts kept the bulk of their spending money at a bank, if only because they were able to get canceled checks returned free, a service that asset-management accounts don’t offer.
“Lots of people may not care about getting checks back; others still think it’s a good idea to look at them,” says David Walker, managing principal with Carreker Group, a Dallas consulting firm. “The fear of losing these customers to competitors has held banks back” from doing away with the service, he adds.
What to do if your bank charges for canceled checks? First, decide whether you can live without them. If so, consider alternatives. A brokerage house’s money-fund checking account–typically open to investors with at least $5,000 to $25,000 total in cash and stocks, bonds or mutual funds–can be a better deal.
Your cash won’t be insured against a share-price drop, because brokerage firms don’t offer coverage by the Federal Deposit Insurance Corp. But few money funds have experienced a share-price drop. And in most cases, fund companies have stepped in to cover shareholder losses. Most brokerage firms provide private insurance coverage of as much as $10 million to $50 million, in case they go bust. The Securities Investor Protection Corp. covers up to $100,000 in cash.
Also, credit unions and S&Ls don’t return checks, but typically charge lower fees than banks.
To find the best deal for you, multiply your average balance by the yield of a brokerage firm’s money-market fund, or any other interest-paying checking account. With $7,000 stored in an account yielding 4.75 percent, you would earn $332 a year in interest. Now subtract all fees you would pay in a year–let’s say $150 for account “maintenance” plus $1 per withdrawal at an automated teller machine. With six monthly ATM withdrawals, your annual bill for fees would be about $222. You still come out about $110 ahead.
Do the same for your bank’s checking account, subtracting fees from any interest. With no fees, no interest, your gain would be zilch.
Account statements with receipts or bills are acceptable stand-ins for returned checks.
Even in an audit, the Internal Revenue Service will take statements listing people or companies you paid. These souped-up statements are available from some brokerage firms with money-fund checking accounts, such as Merrill Lynch and Prudential. Some brokerage houses also will presort your tax-deductible expenses when you show what type of expense a payment is, by putting a checkmark in a box printed on a corner of each check.
Bank checking-account statements show only check numbers, dates and amounts, no payees. But that isn’t a problem if you can hand over check registers or checkbook carbons naming whom you paid.
Mortgage lenders once demanded that applicants provide a year’s worth of canceled rent or mortgage checks. Now they size up your payment history using credit reports and, in some cases, questionnaires completed by a former lender or landlord.
For business expenses, handing over your statements probably isn’t wise. Submit only a bill or a receipt listing the expense that your company should cover. That’s all most employers require. “Companies know that relying on canceled checks is a pain for employees because there is a long lag time before they are reimbursed,” says Lee Exton, a consultant at Watson Wyatt Worldwide, an international management consulting firm.
Before opening a new account, find out what it will cost and how long it will take to get copies of canceled checks. Typically, you can get one within a few days for a fee of $1 to $5. But some banks need more time than others to fish out a copy. One may send a guy into a warehouse to dig through reams of microfiche, while another can call up a computer image of your check, and copy it right away.
Stay alert for mistakes. As always, review your statements, looking for errors. It’s not uncommon to find errors by bank employees who, working at breakneck speed, occasionally enter payments for the wrong amount.
