What is a Substitute Check?

A Substitute Check is a digital reproduction of an original paper check. In the U.S. the Substitute Check is a negotiable payment instrument and is considered to be legal check in lieu of the paper check. 

Financial institutions and payment processing centers use the Substitute Checks for a transaction between themselves to speed up the check circulation process. These are generally slightly larger than the original paper checks with images of the front and back side of the check. It includes text that indicated the check is a legal copy.

Substitute checks are authorized under the Check Clearing for the 21st Century Act or Check 21 Act. It allows the recipient bank of a paper check to make an electronic version of the original paper check and the digital copy of the check is known as Substitute Check. 

The payments of converted checks are governed by Automated Clearing House Payments rules and not by the Check 21 Act. 

What are the Requirements for Substitute Checks?

There are certain legal requirements which are to be followed while creating a Substitute Checks. If a Substitute Check doesn't adhere to these requirements, the check will not be considered as a legitimate equivalent of the original check. Those requirements are: 

(i) A Substitute Check must include all the details that are depicted on both sides of the original paper check and that information must be accurately represented in the copy. This information includes full names of the payor and payee, courtesy and legal amounts, encoding information, endorsements, and others. 

(ii) The MICR line of the original check must be accurately represented in the Substitute Check. 

(iii) "This is a LEGAL COPY of your check. You can use it the same way you would use the original check"- this must be clearly written on a Substitute Check 

(iv) A warranty must be provided for a Substitute Check by the financial institution at the time of truncation. 

(v) ASC X9.100-140 standards must be followed while capturing the check images and MCR data. 

Substitute Checks are also bound by the Expedited Funds Availability Act, Article 3 (Negotiable Instruments), and Article 4 (Bank Deposits and Collections) of the Uniform Commercial Code (UCC). 

Several other state and federal laws are also implemented on the transaction with Substitute Checks. 

Related Topics

• Commercial Paper (Intro)
• What is Commercial Paper?
• Negotiable Instrument
• What are the common types of commercial paper?
• Promissory Note
• Cashier's Check
• Convenience Check
• Certified Check
• Substitute Check
• Bill of Exchange
• Bank Draft Definition
• Sight Draft Definition
• Bankers Acceptance 
• Who is a Holder of a negotiable instrument?
• Commercial Paper Funding Program
• What is Negotiability and why is it important?
• What is required for commercial paper to be negotiable?
• Sum Certain (Contracts)
• Inflation Adjustment Clause
• When does commercial paper contain an Unconditional promise to pay?
• Backup Line of Credit
• What is Payable on Demand or Payable on Time?
• What is Order Paper and Bearer Paper?
• Bearer Form
• How is a payee identified on the negotiable instrument?
• What rules does the court apply in determining negotiability?
• How is commercial paper negotiated to a holder?
• What is Transfer of a negotiable instrument?
• What is Indorsement of a negotiable instrument?
• What are the various types of indorsement?
• Bank Endorsement
• Blank Endorsement
• Accommodation Endorsement
• How does a holder receive payment on a negotiable instrument?
• Who is potentially liable on (or obligated to pay) a negotiable instrument?
• When is an individual liable for a representative signing a negotiable instrument?
• What rules apply if a holder loses a negotiable instrument?
• When is payment of a negotiable instrument overdue?
• What effect does a negotiable instrument have on the underlying obligation?
• What is a holder in due course?
• What are the requirements for a holder to become a holder in due course?
• Receive an instrument for value?
• Receive an instrument in good faith?
• Receive an instrument without notice of a valid defense?
• How does discharge of the Underlying Obligation affect a holder in due course?
• What is the Shelter Rule?
• Can you limit a transferee from becoming a holder in due course?
• Personal Defenses?
• Real Defenses?
• What is a Claim in Recoupment?
• What are the rights of a holder in due course if the instrument involves a consumer transaction?
• What happens if a negotiable instrument is Forged?
• What happens if a negotiable instrument is Stolen?
• Guaranty or Guarantee
• Letter of Guarantee
• Personal Guarantee
• What is the role of a Guarantor or Surety of a negotiable instrument?
  
• Surety 
  
• Cosign
• Accommodation Paper Definition
• Secondary Liability
• Avalize Definition
• What is an Accord & Satisfaction?
• What is primary and secondary liability on an instrument?
• What is Drawer or Maker Liability for a negotiable instrument?
• What is Transferor Warranty of a negotiable instrument?
• What is Indorser Warranty of a negotiable instrument?
• What is Presentment Warranty of a negotiable instrument?
• What is a warrantors liability for a dishonored note or draft?
• What is the time limitation for warranty of a negotiable instrument?
• When are the warranties of a negotiable instrument discharged?