Check 21 Act – Definition

Cite this article as:"Check 21 Act – Definition," in The Business Professor, updated September 19, 2019, last accessed October 28, 2020,


Check Clearing For The 21st Century Act (Check 21) Definition

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.”

A Little More on What is the Check 21 Act

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.

References for the Check 21 Act

Academic Research for the Check 21 Act

Remote Deposit Capture: A Legal and Transactional Overview, Levitin, A. J. (2009). Banking LJ, 126, 115. This paper is a brief overview of the transactional and legal problems related to the Remote Deposit Capture (RDC), which is a technique to deposit checks to the depository institution without any physical delivery. So, how is this deposit made possible, when the account holder does not visit the financial institution? The author explains that it is done remotely using a Remote Deposit Capture.

Cost savings from check 21 electronic payment legislation, Humphrey, D. B., & Hunt, R. (2013). Journal of Money, Credit and Banking, 45(7), 1415-1429. The legislation of electronic payment allowed an initially paper substitute in the form of a check’s digital image to present and process on the basis of the same day for payment. Moving to electronic presentment and collection caused the processing costs of per item check issued by Federal Reserve fall by almost seventy percent. In 2010, it reduced the total estimated costs of the United States payment system by 1.16 billion USD. Times of payment collection and the linked float dramatically fell for collecting payees and banks with subsequent extra savings in company working capital cost of around 1.37 billion USD and indebted 0.64 billion USD consumer benefits.

Cutting checks: challenges and choices in B2B e-payments, Cotteleer, M. J., Cotteleer, C. A., & Prochnow, A. (2007). Communications of the ACM, 50(6), 56-61. For B2B (Business to Business) payments, there are several changes occurring increasingly and the need is to draw the attention of the executives towards it. Mainly, what is motivating in the use of advanced technology is the new legislation in the United States, increasing demand for electronic payments and reducing paper check volumes. Businesses are going to realize that it is the requirement of the modern era to add new options of payment to a process which the paper checks, ACH (Automated Clearinghouse) transactions and wire transfers are still dominating. So, the authors discuss the challenges faced by the executives and the available options of e-payments.

Stopping Payment on a Cashier’s Check, Fox, F. H. (1977). BCL Rev., 19, 683. The statutory section can govern what are generally the negotiable instruments to be used in the country. Accordingly, the banks have a right to decide about paying the check of their own cashier or to decline it. This is because the Uniform Commercial Code (UCC) has no particular provisions concerning checks of a cashier. Though many courts recognize that the check of a cashier serves an important commercial purpose (if not unique), there is no consistent emergence of judicial analysis of the check a cashier has as a legal obligation. This paper evaluates various ways, the court analyses the obligations and rights resulting from the issuance of the check a cashier has.

Retail payments: New contributions, empirical results, and unanswered questions, Humphrey, D. B. (2010). Journal of Banking & Finance, 34(8), 1729-1737. This research is a review of 8 papers which people presented in the latest payment conference of Central Bank of Norway, named Norges Bank. The author describes the contribution of those researchers and their publications to the literature of payments. He also explains with examples of how countries differences, such as on an institutional level, caused historically various payment arrangements that have paid arrangements more homogeneous around countries because of technological innovation influencing the costs of the bank. The author suggests a retail payments survey and areas where extra research can be useful.

SecureSMSPay: secure SMS mobile payment model, Harb, H., Farahat, H., & Ezz, M. (2008, August). In Anti-counterfeiting, Security and Identification, 2008. ASID 2008. 2nd International Conference on (pp. 11-17). IEEE. The authors present a model of secure mobile payment best suited for macro transactions which compromise transaction performance, simplicity, cost and security with fewer operations of encryption or decryption and the least cryptography main usage than other models. This model uses symmetric as well as asymmetric cryptography. It does not require trusted third parties or even the complexity of PKI (Public Key Infrastructure). The SMS acts as a transport channel to make transactions with the payer (not payee) unlike generally, recent models of payment transactions. It is applicable for money transfer, electronic check, e-commerce and also EFTPOS (Electronic Funds Transfer at Point of Sale) with leveraged infrastructure.

The US Retail Payments System in Transition: Federal Reserve Initiatives, Pacheco, B. S. (2006). Payment System Research Briefing. This paper focuses on the initiative taken by the Federal Reserve in transition for the retail payments system in the United States. It is actually thorough research on the role of the Fed, the future and trends of payments based on the changing landscape of retail payment system in the US.

The Check Clearing for the 21st Century Act-A Wrong Turn in the Road to Improvement of the US Payments System, Felsenfeld, C., & Bilali, G. (2006). Neb. L. Rev., 85, 52. The Federal Reserve System in the United States passed the ‘Check Clearing for the 21st Century Act’ on 28th Oct 2003 and after 1 year, became effective. It is basically for the modest innovation in the check clearing system. The purpose was to make the checks transfer faster to the paying bank from the depository. It is expected that it will cause the electronic presentment, which is a process making the check clearing as fast as today’s e-payment systems. However, it is also objected on the grounds that it is a wrong turn in the way to the system’s improvement. The volume and number of checks started declining. People will stop using checks gradually and consider it as an ugly memory.

The role of private sector payment rules and a proposed approach for evaluating future changes to payments law, Ballen, R. G., & Fox, T. A. (2008). Chi.-Kent L. Rev., 83, 937. This paper highlights the role of private sector payment rules devised by the organizations for participating financial institutions. It should keep the rules consistent with customer protection and improve their relationship with the financial institutions. This paper also addresses the problem in making new payment legislation at the federal and state level in the past 20 years. The authors present a paradigm for the evaluation of subsequent changes in the laws of the payment system. He proposes to unify these laws across the types of payment products.

Implementing the Check 21 Act: Potential risks facing banks, Rice, T. (2005). J. Payment Sys. L., 1, 464. The Check for the 21st Century Act was introduced to bring advanced changes in the payment system and to boost its efficiency by minimising the legal obstructions to check truncation. It proposes a new negotiable instrument known as the Substitute Check and gives it the legal status like the original check. However, there are potential risks that the banks may face in the future, such as the use of checks will become obsolete and people will recall it as a bad memory.

Recent payment trends in the United States, Gerdes, G. R., & Wang, K. C. (2008). Federal Reserve Bulletin, A75. This research throws light on the latest payment trends in the US. According to the records of Federal Reserve 2003, in the US, the number of e-payments (using networks of credit and debit card and ACHS (automated clearing house system) surpassed the number of check payments. It happened the first time in the history of the United States. Then, in 2006, it became more than two times or two 3rds of all payments (noncash). It has given rise to the value of electronic payments. Then, in 2007, the Federal Reserve collected data from a survey. It shows sequential changes in the way, individuals and business groups make payments.

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