Beginning October 28, 2004
digital images will become the legal equivalents of paper checks. Check 21
(Check Clearing for the 21st Century Act) legislation signed by the
President in October 2003 legalizes the use of digital images of checks as
official image replacement documents (IRDs). This enables both banks and
corporations to convert a paper check to digital format and consider the
electronic image file to be the legal version of the check.
otherwise agreed to, when a check is deposited it must be physically
received at the issuers’ bank for the check to “clear”. Effective
October 28, 2004 banks and corporations will have the option of creating,
processing and sending digital pictures of checks to the issuing bank
rather than sending the original check.
Congress and the Federal
Reserve believe there are three major benefits to the Check Clearing for
the 21st Century Act.
First: To improve the
overall efficiency of the nation’s payment systems. The Federal Reserve
and the other check clearing-houses process 42 billion checks each year
and often they process those checks more than once in the case of
insufficient or other problem checks.
The shutdown of air
transportation in the days following the September 11, terrorist attacks
forced the banking industry to transport checks by ground, which resulted
in businesses creating good-faith grace periods for late payments.
Processing delays can still be attributed to the aftermath of September
Second: To facilitate
check truncation by authorizing the use of substitute checks instead of
the original checks. Truncation is the process of removing an original
paper check from the collection or return process and creating a
substitute or electronic check to clear the item for payment or return.
Many checks, today, are truncated but permission has to be obtained from
the account holder before that can occur. Under Check 21 permission to
truncate is no longer required and the check writer cannot demand the
original check back. The entity that stops the check is free to destroy
Check 21 creates a new
legal document, the “substitute check”, that can be used for
processing payment or for any other reason that might require an original
cancelled check. A substitute check is a legally sanctioned document with
all the rights and obligations given to the original written check.
Substitute checks are paper copies created from electronic or digital
copies of the original checks (front and back, with all endorsements).
Each substitute check includes a statement identifying it as a legal copy
of the original check.
Third: To foster
innovation in the check collection system without mandating receipt of
checks in electronic form. Banks, for several years, have been encouraged
but are not required to accept electronic transfers. Check 21 does not
mandate that banks covert to or accept electronic transfers. However,
banks are required to accept substitute checks.
Unlike check conversion
through the ACH (Automated Clearing House) system, substitute checks will
be cleared the same way as original checks have been under Federal Reserve
board regulations regarding check collection and availability of funds,
(Regulation CC), and state law (Uniform Commercial Codes and state
Under Check 21, businesses
will be able to optimize their check processing operations through various
methods. Let’s use the example of the company who has several lockboxes
around the country and utilizes local banks to clear checks received at
those locations. When Check 21 becomes effective, that same company could
consolidate all its check deposits with one bank, which may not
necessarily be located close to its offices or its customers, and yet take
advantage of electronic imaging to clear checks faster and cheaper.
Companies will no longer be dependent on local banks nor will they have to
manage multiple banking relationships. Check 21 should provide reduction
in bank costs and at the same time increase both productivity and cash
Firms who receive checks
through the mail at their offices can eliminate transporting checks to
their bank by creating digital images and electronically transferring the
information, saving time and increasing security.
The credit department
should begin to educate the customer about the impact Check 21 will have
on their payments after October 28. The customer who frequently makes
payment assuming they will have a week of “float” due to postal delays
before their check finds its way back to their bank for payment will be
understandably upset if not forewarned, that after October 28, 2004,
“payment float” will, for the most part, cease to exist.
I wish you well.
information is provided as information only and not legal advice.
Legal advice should be obtained from a competent, licensed attorney,
in good standing with the state bar association.