What is Check 21?

The Check Clearing for the 21st Century Act (Check 21) was signed into law on October 28, 2003, and became effective on October 28, 2004.

Check 21 is designed to foster innovation in the payments system and to enhance its efficiency by reducing some of the legal impediments to check truncation.

New Check Law works for you

The law facilitates check truncation by creating a new negotiable instrument called a substitute check, which permits banks to truncate original checks, to process check information electronically, and to deliver substitute checks to banks that want to continue receiving paper checks.

A substitute check is the legal equivalent of the original check and includes all the information contained on the original check.

The law does not require banks to accept checks in electronic form nor does it require banks to use the new authority granted by the Act to create substitute checks.

Check 21 enables your company to implement the latest technology in check processing. You could actually convert a paper check received in the mail or at a payment location into an electronic check.

Deposit Checks from your desk

The paper check is converted into an electronic image known as an IRD document and electronically sent to the receiving bank for presentment. You could literally make your deposits right from your own desk. Be your own Bank teller.

Eliminate Need of Data Entry

The electronic check is presented to the check writer-s financial institution and funds are transferred into the merchant's existing bank account. The system can then provide a file used to update payment information in your in-house accounts receivable system.

Fast Processing equals quick access to operating capital

Check 21 allows the merchant to avoid the time consuming processing of paper checks, banks run for deposits and data entry. In most instances checks submitted electronically are processed at the bank before other paper checks are cleared giving you quick access to valuable operating capital.

Let's be clear about one thing:

Check 21 does not mandate check truncation; instead, it creates a new legal environment in which truncation can evolve.

It evolves by sanctioning a legal replacement for checks, called the "substitute check," which can be generated from a check image file when the paying bank and/or the check writer insists on receiving paper rather than electronic check images as proof that a payment occurred and was settled.

Technically, substitute checks will need to be created by banks, according to regulations proposed by the Federal Reserve which implements the new law.

However, banks can enter into agreements with merchants (similar to the way things are handled in the ACH check conversion arena today) that allow merchants to capture check images at the point of sale and begin the truncation/electronic clearing process before those checks enter the inter-bank collection stream.

Check 21 beats ACH Check Conversion

POS truncation will prove to be a lot more popular than POS check conversion, for a variety of reasons. For example, a check imaged and truncated at the point of sale continues to be covered by check law even though it clears electronically.

In POS (ACH) check conversion, checks cease to be governed by check law because the payments, in reality, have been converted to electronic payments.

Federal and State EFT laws are more consumer friendly than check laws. Under ACH law, consumers have 60 days from receipt date of monthly bank statements to file a complaint with their bank regarding any questionable transactions. Check law allows consumers just 40 days to dispute transactions.

More checks are eligible for POS truncation in a post-Check 21 environment. Business checks, courtesy checks, cashiers' checks-any and all checks can be truncated. ACH check conversion is limited to traditional consumer checks.

Truncated Checks Clear Faster

Perhaps the most obvious advantage of POS truncation for merchants, though, is that truncated checks will clear and post more expeditiously than checks converted to ACH transactions.

That means better availability and a better jump start on identifying fraudulent payments-a problem that is believed to be costing the merchant community $10 billion, or more, a year.

Transmit Checks to Bank upon acceptance

The ACH is a batch processing system. That means checks converted to ACH payments must be sent en masse by a certain cut-off each day (usually in the afternoon) to the bank that processes the items through the ACH.

With truncation, a merchant conceivably could image and transmit a check payment to its bank at the moment of acceptance.

No travelling equals checks as one-day items

A merchant may choose (or have to because of technology constraints) to send truncated check images all at once.

However, with truncation, a bank's cut-offs for check deposits can be much later than is the case today, because there's no transportation component to the deadlines.

That means a larger share (possibly all) of a merchant's check deposits become one-day items.

In other words, when checks are truncated and electronically deposited, funds are posted to the merchant's account the very next day, even if the electronic files arrive at the bank after 9:00 pm.

Most ACH payments post to merchant accounts two days after a check is converted at the point-of-sale.

The benefits of POS check truncation are too significant to ignore.