What is Check 21?

The Check Clearing for the 21st Century Act – legislation authorizing financial institutions to truncate checks and exchange images instead of paper checks. This law also allows for the creation of substitute checks or IRDs (Image replacement documents). Check 21 went into effect (as Federal law) October 28, 2004.

Please refer to the Federal Reserve’s website for more details and to view the legal documents to this effect.

What does Check 21 do?

Check 21 improves check processing without requiring customers to change the way they write checks. Check 21 allows the financial institution to make a unilateral decision to truncate all paper check without agreements of any other party. Check 21 authorizes the creation of the substitute check from an electronic record (image) of the check for those banks who have not agreed nor have the capability to accept the electronic record.

Check 21 includes several safeguards for check-writing consumers. Check 21 helps speed check clearing, so check fraud can be discovered faster. Faster fraud detection means faster resolution for customers. Another safeguard: a bank that creates a substitute check must warrant that it is accurate. The bank also has to make sure that the substitute check is produced in accordance with industry standards for quality.

Why was Check 21 created?

While the current paper check clearing system in the U.S. is well established, the logistics of moving physical paper checks across America to clear has long been an impediment to further efficiencies. Check 21 Act was enacted primarily in response to the September 11th, 2001 terrorists' attacks that grounded virtually all check payments and forced the U.S. government to rethink how paper checks are processed. This new law will eliminate much of the risk associated with moving billions of checks, such as: transportation breakdowns (labor and mechanical), weather delays, natural disasters, fraud, theft and terrorism.

What is a “Substitute Check”?

A substitute check is a paper reproduction of the original check that contains the front and back information of the original check, bares the MICR line containing all the information contained on the original check and is in compliance with ANSI standard X9.100-140. A substitute check is a paper copy of the digital image of your original check – both front and back, with all endorsements – and is about the size of a business check. Check 21 legislation sets standards for quality and allows for substitute checks to be legal copies of the originals. All banks must accept the substitute check as they would the original document

All substitute checks are required to include the following statement: This is a LEGAL COPY of your check. It can be used the same way you would use the original check.

Some of the existing standards for paper checks and electronic images of checks that will continue to apply to substitute checks are:

* ANS X9.18 Paper Specifications for Checks
* ANS X9.13 Specifications for Placement and Location of MICR Printing
* ANS X9. 7 Bank Check Background and Convenience Amount Field
* ANS X9.27 Print and Test Specifications for Magnetic Ink Printing
* ANS X9.53 Specifications for Check Endorsements
* DSTU X9.37 Electronic Exchange of Check and Image Data
* ANS X9.100-140 (formally DSTU X9.90)

To learn more or to purchase the standards above please visit ANSI's Website.

Is Check 21 mandatory?

Check 21 does not mandate electronic processing of digital check images. It simply makes it possible. For banks that choose to process checks manually, a substitute check will be made of the image, which will be processed as if it were the original.

What items are subject to Check 21?

All checks, including cashier's checks, payroll checks, personal checks and business checks are subject to Check 21. Savings bonds are not checks and therefore are not subject to Check 21.

What are some of the common misconceptions regarding Check 21?

* Check 21 does not require banks to provide or accept images. Institutions can continue with conventional check processing. Physical, original checks can continue to be presented for collection, and substitute checks must be machine-readable, just like an original check.
* Check 21 does not authorize, regulate, or govern image exchange or check truncation.
* The proposed legislation does not address pricing, nor does it state that paying banks will be charged a fee to receive original or substitute checks
* Banks will continue to require equipment to scan and, for some institutions, encode and sort the items. It is clear that Check 21 strengthens the business case for decentralized capture since it offers the opportunity to completely eliminate physical transportation. However, the implementation will depend on the individual institution's business case.

How can I implement Check 21 within my institution?

Check 21 Implementation Video is primarily designed to assist financial institutions with their in-house training in preparation for the new federal law that becomes effective October 28, 2004.

The video is an information-packed, 45 minute, self-contained, training session. It is subdivided into 9 chapters allowing the viewer to easily replay selected topics thus promoting and reinforcing learning. These chapters are:

Introduction

Overview, Key Benefits, Substitute Check (front)

Substitute Check (back), Legal Provisions

Expedited Recredit Provisions, Check Retention, Consumer Awareness

Agreements Beyond Check 21

Misconceptions and Minimum Requirements

Expedited Recredit and Consumer Awareness Details

Return Items, Position 44, Risk Management, Bank Products

Key Points to Know

Other useful FAQ you can find on the web

FAQ from ECCHO
FAQ from the Federal Reserve Board
FAQ from X9.org

Useful documentation on Check 21

Check 21 Act
Check 21 Congressional Report
Check 21 Resource Document
You think you know Check 21? Resource: ECCHO

Industry Links on Check 21

www.eccho.org
www.bai.org
www.frbservices.org
www.bankersonline.com
www.aba.com