What is Check Truncation?

Check truncation as used in American English refers to a system of clearing check that involves the removal or elimination of physical paper cheque processing and replacing it with electronic means, through which checks are deposited in the bank and then processed for payments. In other words, it is a check processing system where the verification system of checks is done using digital copies instead of tangible paper copies.

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How Does Check Truncation Work?

Generally, check truncation processing is much faster and more efficient compared to that of a paper check. This is because it removes the complicated physical transfer of paper checks from one place to the other, hence reducing the period spent on settling payments. Note that banks use check truncation to create what is called, substitute checks. A substitute check is a document considered by law to be valid and, therefore, equal to the original check. This is because the information on the substitute check is the same as that on the original checks. This document is officially used to carry out financial transactions. Most banks usually do away with the original check once they have made a substitute check. However, when sending an account statement, the bank may consider sending you a substitute check in case of check cancelation. Also, where verification of payment is involved, you can ask from your bank a copy of the substitute check. Note that in some banks, there is a fee you are required to pay for them to issue you with this document.

Why Check Truncation was Created

The original process of clearing checks involved taking the check to the bank of the drawee. As the usage of checks increased, the paperwork became more and more cumbersome for banks to handle. Banks had to arrange a meeting so that they could meet and exchange checks as well as make payments in cash. On the other hand, customers had to deposit checks in person to their own banks. The bank would then forward the check to the drawees bank. This process also involved crediting and depositing of cash from respective accounts. In case a check is canceled, then the bank would physically return the check to the original bank. Note that this manual check processing would take a number of days because the clearing cycle involved transporting checks to and from various places, until the last verification is done and payment is done. This required a lot of time and large manpower to get the job done. However, because of this tedious and cumbersome processing cycle, some countries decided to create what is called, "Check 21 Act," a law that allowed banks to implement truncation. The banks would scan the original check to make a digital copy which then would be used by banks to do transactions. When the electronic process is all done and everything is in order, the original check is then destroyed and the digital copy would be used in the banking system to process payments. Truncation was mostly embraced by the banks that received large volumes of checks that required clearing.

Benefits of Check Truncation

• It reduces the time spent on processing paper checks. Note that paper check involves a verification process which is complicated and tedious hence consuming much time. Check truncation, therefore, speeds up the process of check clearing more.
• Secondly, check truncation is cost-efficient as it saves banks from incurring costs involved with transporting paper checks from one place to the other. It is worth noting that with check truncation, you only need to scan and then the scanned copies are emailed to respective parties at once for verification.
• It gets rid of the tedious process of moving check papers from one place to the other. Instead, the process is easily done electronically with much ease.
• Lastly, by using check truncation, it is easier to check the possibility of fraud.

Check Truncation Law

For truncation to take place, countries needed to enact a law that would permit banks to implement truncation. The United States enacted the Check 21 in 2004, which gave banks the authority to implement check truncation. The banks were able to convert the original paper check into an electronic copy which was then presented to the respective bank for clearing. The Check 21 Act that was enacted validated and accepted the use of a substitute check, which was created by banks instead of the original paper check. In addition, the law was necessary to ensure that the digital copy was a real and accurate copy of the original for the purpose of protecting consumers from cases of fraud. Since the paper check would no longer be given back, the law was necessary so that the process of dishonored checks could be addressed accordingly.

Check Truncation Operations and Clearing

When working with check truncation, it requires taking into consideration things such as creating an electronic check and also security-related images. The process of check clearing is then adjusted for the purpose of accommodating the electronic check. As part of the process, check truncation system is usually applied. The process involves two things: 

Outward Clearing 

This part of the process clearing is done at the branch level and the following activities takes place:

• Depositing and scanning of checks
• Account entry and amount of entry
• Document verification
• Balancing and banding
• Submitting the check to a service branch

Inward Clearing 

The inward clearing is done at the service branch. At this level, the following activities are carried out:

• There is the processing of checks being received from the branch level.
• There are account and amount entry
• There is document verification
• There is balancing and bundling of checks
• There is submitting the checks to the clearing house after verification

Note that the checks that do not pass validation as a result of them having some errors (discrepancies) are canceled and returned to the original bank for corrections.