What is the Check Clearing For The 21st Century Act (Check 21)?

Check Clearing for the 21st century also known as Check 21, refers to a federal law that was enacted to make it easy for banks to electronically manage checks in a fast and efficient manner, a procedure also called, check truncation. This federal law was enacted on the 28th of October 2004, which gave banks the power to process consumers copies of checks. The original check of the electronic copy is called, substitute check.

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How Does the Check 21 Act Work?

Check 21 allows customers to deposit their checks directly to their bank accounts by scanning it for processing. This enables banks to cut down on transportation costs that come as a result of using paper check processing which requires the paper checks to be transported back and forth a process that is costly to the banks. For instance, using a secure network to deliver a check to a different location is quite easier and less costly, compared to transporting paper checks physically from one place to the other. The process is also efficient in terms of time as it takes a few minutes if not seconds for it to reach the required destination if sent using electronic means. Note that after the fixed holding period comes to an end, banks are usually free to get rid of the original paper check. Nonetheless, it is worth noting that some banks do not destroy the original paper check because some customers usually prefer having the cashed checks so that they can keep a record of the same. 

Check Truncation 

Check truncation is the process of getting rid of the original paper check and instead process the same electronically. To make a digital copy of the original paper check, the copy is usually scanned and then emailed to various parties for processing. In the event that any part requires a hard copy, a copy is usually printed and presented to whoever is in need of it. This printed copy is what is known as, a substitute check. Note that once the truncation of a check is over, instead of banks or business using the original check, they can decide to either use the scanned copy (digital copy) or a printed copy (substitute check). 

Substitute Checks 

Check truncation is by law allowed to create an instrument for negotiation called substitute checks, a document which gives the banks the right to do truncation of the original check, and instead, use electronic means to process the check. Note that for banks that wish to continue working with paper checks, they are issued with what is called, a substitute check. A substitute check is a legal transaction document that is considered to be equal to the original check and contains the same necessary information that the original check has. Basically, it is a scanned copy of the original check, which makes the information contained in the two documents the same. It is, therefore, by law considered to be a valid document that is acceptable in a financial transaction.

Benefits of Check 21 to the Check Depositors and Writers

Check 21 has the following effects to both the check writers and check depositors:

• In case of check cancellation, the affected customer will not receive the original check that he or she is used to. The customer will instead be given a substitute check when his or her account statement is being issued.
• It minimizes the issue of bouncing checks in the sense that the check 21 process is faster and takes a shorter time to be processed since it uses electronic means. This is contrary to where a customer has to deposit the check-in person. The process takes a long time (about 2-3 days), as the checks require physical transportation back and forth until the paying bank finally receives it to process the payment.
• The banks are not required by law to return the original check to you. However, it instead makes sure that your bank issues you with a substitute check just as you would have received the original check for record purposes.
• In case of an error with a substitute check that you are issued with from the bank, check 21 has a flexible process that allows you to claim for a refund. All you are required is to ensure that you contact your bank within 40 days from the date your bank issued you with the substitute check.

Generally, it is worth noting that the law does not make it compulsory for banks to process checks electronically nor are the banks required to create substitute checks using this new act. This, therefore, means that banks are free to make use of the new authority or still can continue using the usual paper check process. So, whether or not a bank embraces this new act, is at the discretion of an individual bank.