In October 2003, the Check Clearing for the 21st Century Act became law. Now known simply as Check 21, the legislation's major objective is to improve the overall efficiency and security of the nation's payments system.
American consumers and businesses write 40 billion checks annually. Today, most checks must be physically transported before they can be cleared. This is an expensive and time-consuming process. On October 28, 2004, banks and other financial institutions will have the option of creating, processing and exchanging digital pictures of checks rather than moving the original paper. Check 21 provides a new option: legal acceptance of paper reproductions of original checks. This reproduction is called a substitute check and is produced from a digital image of your original check.
What does Check 21 do?
Since October 2004, every bank has been required to accept substitute checks, just as they accepted original paper checks. You may see these different electronic images on your account statement. A substitute check is the legal equivalent of the original check and will include all the information contained on the original.
Check 21 includes several safeguards for check-writing consumers. Check 21 helps speed check clearing, so check fraud can be discovered faster. Faster fraud detection means faster resolution for customers. Another safeguard is the bank that creates a substitute check must warrant that it is accurate. The bank also has to make sure that the substitute check is produced in accordance with industry standards for quality.
Electronic Check Conversion
You may already have experienced two other emerging payment practices, each an example of check conversion, which uses the automated clearinghouse, or ACH, system.
In the first example, a retailer converts the paper check into an electronic ACH payment on the spot. In this situation, if you've written a check for a purchase, you are handed the check back immediately after it's converted into an electronic ACH payment at the store or shop.
In the second example, regular service providers for example (telephone bills, utilities, monthly investment contributions, etc.) convert your check payments into ACH payments. The check has been converted to an electronic format, and you don't receive a copy of the original.
The payment will be reflected on your bank statement, which becomes the legally accepted proof of your payment. Keep in mind that both of these example transactions are different from Check 21 and substitute checks. The consumer rights associated with an ACH transaction are similar to those provided in Check 21.
All of these changes allow for faster payment processing and even better service to the nation's banking system.