Changes are bringing Americans closer to a checkless society -- changes that could be costly if you aren't careful.

	Did You Know: Checking Facts The first checks in the United States were written in the late 1600s by Boston businessmen who mortgaged their land to a "fund" against which they wrote checks. Roughly 42 billion checks were written in the United States in 2000, down from 50 billion in 1995. Electronic payment methods are quickly gaining on the check as the dominant form of noncash payments. Credit cards are used about 23 billion times annually, while debit cards are used about 19 billion times. An estimated 60 percent to 90 percent of consumers do not get their canceled checks back in their monthly statements. Less than 10 percent of consumers balance their checkbooks each month. Source: Federal Reserve; American Bankers Association; Nilson Report. More about checking changes Graphic: Deflating the float Coping tips for new electronic check-processing system

A new federal law called the Check Clearing for the 21st Century Act, or Check 21, took effect Thursday and is designed to modernize an antiquated and expensive check-processing system that the Federal Reserve and banks are eager to change.

Each year, billions of paper checks pass through multiple hands and travel on trucks, trains and planes as they move from consumers and businesses to retailers to banks to processors and then to more banks to get paid.

Check 21 is intended to clear a path for electronic processing, cutting transit time and costs. It also is aimed at ensuring that the system is not paralyzed again as it was after the Sept. 11 terrorist attacks, which grounded the nation's air transportation network and stranded millions of checks.

But along with the renovations and cost-savings for banks come pitfalls for consumers and businesses, consumer advocates say.

For one, certain checks will clear faster, making it riskier for people who play the "float" and write checks before money is in their accounts to cover them. By some estimates, careless consumers could be bouncing 7 million additional checks by the middle of next year, racking up another $170 million in overdraft fees each month.

"Every consumer needs to know that any check you write may be the one that clears faster," warned Gail Hillebrand, senior attorney at Consumers Union, publisher of Consumer Reports magazine.

Some consumer and fraud experts also have been sounding an alarm about security risks posed by new electronic databases that could be vulnerable to hackers. The Fed says those concerns are exaggerated.

One thing is clear: The old-fashioned way of processing checks by physically hauling them around the country is on the way out, maybe along with checks themselves.

The new law doe not mandate electronic check-processing, but gives it a jump-start by allowing banks and processors to replace paper checks they receive with electronic versions. They can then transmit the checks electronically to processors or banks equipped to take them, or they can create what are being called "substitute" checks. Those are specialized paper copies of the digital image for shipment to the paying bank. Under the law, banks and processors must accept a substitute check as though it was the original.

Some paper remains

Substitute checks are needed because most of the nation's 15,000 financial institutions are not capable yet of receiving check images needed to complete the process electronically. But the industry is expected to come up to speed fairly quickly.

"A year from now, my expectation is most large banks ... and many second-tier banks will be doing [all-electronic check processing] at least on a small scale," said Dan Littman, product manager with the Federal Reserve Bank of Cleveland, which oversees the Pittsburgh region.

The biggest impact of Check 21, both now and in the future will be on out-of-town checks, which could clear a day or two sooner than they do now. Businesses, which write and receive the most out-of town-checks, will notice the change most.

The majority of personal checks are local, meaning they are written on and collected by local banks. Such transactions already clear overnight, at least in this part of the country, and in some cases they clear the same day. Because checks are processed in batches, those local checks will not process any faster under Check 21, Littman said.

Consumer advocates warn, however, that many checks will clear faster. And the new law does not require banks to credit deposits any sooner. That could make for some unusual problems.

Under federal funds availability rules, banks generally can wait up to two business days to credit a deposit made via a local check and up to five for out-of-town checks. An individual could deposit a paycheck on Monday, write a check for groceries on Tuesday, and see funds to cover the grocery check debited before the paycheck clears.

The Fed's Littman doesn't dispute that possibility but points out that the same thing could have happened before Check 21. He said the Fed board plans to review funds availability rules "down the road," after electronic processing takes off. At that time, "deposit hold periods are likely to get shorter or changed in some fashion," he said.

In the meantime, consumers are voicing their displeasure. "It's not fair to speed up checks and not to speed up deposits," is the biggest gripe about Check 21 posted at the Consumers Union Web site, according to Hillebrand.

She advises consumers to sign up for the direct deposit of paychecks, Social Security or other recurring checks, which gets the funds credited to accounts more quickly.

Under Check 21, banks and processors initially are expected to target non-local and large-dollar checks for electronic processing because speeding those checks along provides the biggest savings.

Gradually, consumers who normally get their canceled checks returned with their statements each month will notice more substitute checks showing up instead of the originals, which will have been destroyed.

Between 60 percent and 90 percent of consumers no longer receive their canceled checks, however, according to industry estimates. At PNC, the region's largest bank, 60 percent of consumers do not get them, while at No. 4 Dollar Bank, the figure is nearly 90 percent. Those customers will only see substitute checks if they request them for proof of payment, for example.

While some experts are concerned about the safety of electronic check processing, others say the change is overdue.

"Electronic processing is definitely more secure," mainly because checks will not pass through so many hands, Littman said. "Less handling means fewer problems," he said.

Computers also will leave a better trail for tracking problems, he said.

But critics contend electronic processing will remove a measure of privacy and make consumers easy prey to fraud and theft.

"It's possible to get private information off a personal check," Hillebrand said, ''but it's cheaper to get it off an electronic database."

Check databases will be vulnerable to theft by hackers, similar to the way credit card numbers have been stolen en masse.

"I'm not saying there aren't vulnerabilities like that," Littman said. "But I think they're overblown."

In any case, the march toward electronic processing is not likely to be stopped. After all, electronic payments aren't anything new.

Millions of people have their paychecks deposited electronically, while millions pay their bills online, allowing businesses to electronically debit their checking accounts. More recently, Wal-Mart and other retailers have begun using electronic check conversion at the register, taking a customer's paper check and scanning it to convert it into an electronic payment. The check is then immediately returned to a sometimes perplexed-looking customer.

All of those transactions are handled by the Automated Clearinghouse (ACH) system that member banks and businesses have used to transfer funds as far back as the 1970s.

Also about 23 billion credit card transactions are made each year, and debit card transactions, which electronically take money from checking accounts have doubled in the last four years to roughly 19 billion annually.

Some see electronic processing of paper checks as the final impetus for their extinction. With float time disappearing, people increasingly are likely to switch to simpler payment methods, such as online banking and debit cards, these experts say.

Indeed, checks have been on the decline since peaking at about 50 billion annually in the mid-1990s. Roughly 42 billion checks were processed in 2000, according to the latest figures from the Fed. A new report due out next month is expected to show the pace of the decline has quickened.

Nevertheless, checks remain entrenched in many households, representing roughly half of all noncash payments. "That's still a lot of checks," Littman said.

Banks are required to explain changes under Check 21 no later than the first statement after the act took effect, although customers who currently do not receive canceled checks only have to be notified in certain instances.

Consumer groups are urging all checking-account customers to be vigilant about reviewing their monthly statements. Some worry that mistakes, such as double posting, will be more common under Check 21.

"There will be both electronic and paper versions of checks floating out there, and consumers could see themselves double-charged erroneously," said Beth McConnell, director of the Pennsylvania Public Interest Research Group in Philadelphia.

But Littman contends those problems will be no more likely than before.

If you see a suspicious transaction and you are not getting canceled checks or substitute checks with your statements, ask for one for that transaction. Getting a substitute check triggers specific consumer rights, giving the bank no more than 10 days to review the transaction before it must recredit your account.

Customers also should find out if their bank plans to charge a fee for the substitute check. Consumer groups argue there should not be any charges since electronic processing saves banks money. At PNC, customers can get up to 20 substitute checks per month for free if they request them by phone or online. Requesting them at a branch, however, will cost $5 each.

Consumers should question their banks about the effects of Check 21. If they don't like the answers, Hillebrand said, "shop for another bank."