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Check 21
American consumers and businesses write millions of checks each month. Today, most of these checks must be physically transported between financial institutions before they are cleared, a process that is expensive and time consuming.
To streamline check processing, reduce paper, combat fraud and improve the nation's financial system overall, one major industry-wide initiative will go into effect in 2004: Check 21 legislation. The following information is designed to help you understand this important initiative and how it impacts you.
What is Check 21?
The Check Clearing for the 21st Century Act, better known as Check 21, is a new federal law that goes into effect on October 28, 2004. Check 21 establishes what is known as a “substitute check”. A substitute check is a paper reproduction of an original check that contains an image of the front and back of the original check is suitable for automated processing in the same manner as the original check, and meets other technical requirements. A substitute check has the same legal standing as the original check and can be processed just like the original check.
What is the purpose of Check 21?
The stated objectives of the legislation are:
• To encourage banks to use image presentment of checks by allowing a substitute check to replace the original check.
• To foster innovation in the check collection system without mandating receipt of checks in electronic form.
• To improve the overall efficiency of the nation's payments system.
Why is Check 21 important?
After the events of September 11th, when air traffic in the United States was grounded, the importance of being less reliant on transportation became apparent. Check 21 was proposed by the Federal Reserve as a solution to keep funds flowing, even when air and ground transportation is halted. Check 21 provides new alternatives for how a check moves through the clearing system from point A to B. With Check 21, banks will be able to send digital images of checks electronically, eliminating the need to physically transport checks between banks. 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 is a substitute check?
A substitute check is the legal equivalent of an original check. Essentially, it is a paper copy of an electronic image of the original check, both front and back, including all endorsements. It's about the size of a business check. A substitute check must bear the following language: "This is a LEGAL COPY of your check. You may use it in the same way you would use the original check."
How will I benefit from Check 21?
You may have earlier access to your funds and faster, more convenient access to information about your checks - such as online images.
You will have better fraud protection. Faster processing means faster detection and faster resolution.
As banks gradually move forward with reliance on images, instead of paper checks, it is less likely that an identity thief will come into possession of the personal financial information located on your check. When the original check is physically taken out of the processing stream, the security of electronic channels limits human contact with your financial information.
What changes will I see due to Check 21?
You will continue banking with Florida Bank of Sarasota as you do today. If you currently receive check image statements or view images online, you may notice that some of your checks have been changed into substitute checks. If you currently receive your canceled checks with your account statements, you may get original checks, substitute checks, or a combination of both with your statements. If you need a copy of a canceled check, the copy may just look different. It could be a copy of a substitute check instead of a copy of the original check. This will become more and more common as other banks start to incorporate substitute checks into their processes. Substitute checks will look slightly different than the originals from which they are created. It's important to remember that a substitute check is the legal equivalent of the original paper check.
Does Check 21 apply to all check types?
Yes. The ability to create a substitute check applies to all U.S. drawn checks: personal, business, commercial, cashier’s, traveler's, US Treasury, state and local government, money orders, share drafts (i.e. mutual fund drafts), warrants, etc.
Can I opt out of Check 21?
No. The law requires that everyone - banks, customers, businesses, government agencies - accept substitute checks as if they were original checks. Substitute checks are the legal equivalent of the original check and must be accepted as proof of payment.
Will I receive cancelled checks back?
If you currently receive cancelled checks back with your statement, you may receive originals and substitute checks, or a combination of the two. If you currently receive images of your checks, you may receive images of substitute checks.
Will my check(s) clear faster?
Check processing will be faster with the implementation of Check 21. Funds may be removed from your account sooner; therefore there will be less “float time”. As more banks capitalize on the opportunities presented by Check 21, checks you write may clear faster. Checks you deposit may also clear faster and notification of checks you deposited that are returned may occur more quickly too. As always, make sure you have sufficient funds on deposit in your account before writing a check.
How does Check 21 differ from ACH Check Conversion?
Electronic check conversion (or e-check) is the process of converting a physical consumer check (at the point-of-sale, for example) to an ACH or other electronic transaction. Typically, the retailer takes your check and scans it for the encoded financial information after obtaining your authorization. The check is then stamped "void" and returned to you. Check 21 involves creating digital images of original checks, but they are processed under the same laws and regulations as paper checks. On your monthly statement, a substitute check will be listed with your other checks; an e-check will be listed with other electronic funds transfers, such as automated debits for health club memberships or a payment with a utility company.
What if there is an error involving a substitute check?
In addition to the same protections that apply to original checks, the Act provides extra protection for substitute checks. The Act requires that the bank provide two warranties: first that the associated transaction will not double post and second that the substitute check created meets the legal requirements for substitute checks. Florida Bank of Sarasota will have procedures to comply with these warranties should you report an error.
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