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Checks in the 21st Century
Today the entire banking system processes over 40 billion checks annually. The collection process involves multiple couriers that physically transport paper checks all across the country. New banking legislation called Check 21 will be changing how banks may exchange these same items and utilize new technology.
Included with this newsletter is a Check 21 Fact Sheet that explains key features of this new legislation. Our bank website www.ubt.com contains a brief video presentation that explains this change in check collection as well.
Check imaging technology implemented by Union Bank several years ago has prepared us well for these upcoming changes. Today, customers may receive imaged copies of their original checks with their monthly statements, or can view those same images with their computer on-line through our personal and business banking products.
Starting this fall, banks may begin to exchange check images electronically, and reduce the time involved in the check collection process. Additionally, banks that do not have check image technology could utilize a “substitute” check, which is a paper copy of the original check. The bank that creates the substitute check must warrant that it is accurate and complies with industry standards. The original paper checks may be truncated by the depository bank and later destroyed. The substitute check is the legal equivalent of the original check and will include all the information contained on the original.
This new method of collection will also allow for faster collection of checks between banks, which in turn could reduce the float time customers may have anticipated. It will become more important that deposits are made prior to checks written to avoid insufficient funds at the time of presentment. Faster collection times will also allow banks to identify fraudulent activity sooner and assist in protecting your account.
In addition to the new substitute check and check image processing, customers may have already experienced other check collection methods currently utilized. Check “conversion” is the process of converting a check into an electronic ACH payment at the business. Basically, bank routing number and customer account number information is recorded electronically, and the paper check returned to the customer as a receipt. Larger payment centers, utility companies, and some telephone companies utilize similar technology to convert paper checks to electronic payments. The payment listed on your statement then becomes the legal proof of payment.
All of these payment methods and technology improvements are intended to speed up the payment process, improve efficiency, and service delivery to all banking customers. Should you have any questions regarding this or any other operational issue please feel free to contact myself or any of our branch offices for assistance.
What is Check 21?
Check 21, or as it is more formally known, "The Check Clearing
for the 21st Century Act," is legislation that takes effect October
28, 2004. Check 21 will allow financial institutions to convert original
paper checks into electronic images for processing. Under the current
check clearing system, original checks are cleared with other financial
institutions through the exchange of paper items by way of couriers.
How Check 21 works
Once Check 21 becomes law, the bank of first deposit (or any bank within
the clearing process) will be allowed to truncate original checks and
create electronic images of those items for forward processing. The
electronic images will then travel through the clearing process as images
as long as the receiving banks are willing to accept items in an image
format. If there is a bank (or banks) in the clearing chain that does
not wish to accept imaged items, then the electronic image must be turned
back into a paper check for that institution. In order to accomplish
the recreation of a paper item, Check 21 creates a new item type known
as a “substitute check.”
What is a substitute check?
A substitute check, also known as an image replacement document (IRD),
is a copy of the front and backside of an original check created from
the electronic imaged information. A substitute check is the legal equivalent
of an original check and will contain the following legal legend, "This
is a legal copy of your check. You can use it the same way you would
use the original check."
Once Check 21 takes effect, substitute checks may
be negotiated the same way original checks are today.
Why is there a need for substitute checks?
The Check 21 Act does not require financial institutions to start processing
electronic images instead of processing checks; it simply makes electronic
image processing an option. For financial institutions that are not
image-enabled, there must be a way for these institutions to receive
their customer’s items; therefore the creation of a substitute
check, or image replacement document (IRD) was needed.
What to expect
Once Check 21 becomes law; every financial institution will be required
to accept substitute checks. Therefore, after the Check 21 effective
date, customers may begin to receive substitute checks instead of receiving
an original item (most likely as a returned deposit item). There is
also the possibility of seeing substitute check images on monthly image
statements rather than the actual check image itself.
As financial institutions start to clear electronic check images rather
than paper checks, there is the distinct possibility of accelerated
check processing times. Currently, checks are transferred between financial
institutions manually by way of ground and/or air couriers. Because
financial institutions will have the option to truncate checks and process
the images electronically, there is the potential for reduced clearing
times, or float, for customers. As collection methods improve throughout
Check 21 process and beyond, float times will further be reduced.
Given that Check 21 may result in faster, more efficient check processing,
it is important that customers only write checks on funds that are in
the account as they may no longer be able to rely on float.
Can the original check and the substitute
check both be processed?
The financial institution that creates a substitute check warrants (or
guarantees) that the original item will not presented against the account.
In the unlikely event that both an original check and a substitute check
are processed, the accountholder will be able to submit a warranty claim
to reclaim their funds.
Fraud and Check 21
One of the benefits of Check 21 is faster clearing times. An added benefit
of faster clearing times is faster fraud detection. Since items may
clear accounts faster, customers will be aware of the fraudulent situations
more quickly. This ultimately means faster resolution for the customers
in fraud related instances.
Personal:
Business:
