2003 Annual Report - St. Louis Fed

To enhance efficiency and foster innovation in the payments system, the Federal Reserve System sponsored the Check Clearing for the 21st Century Act (Check 21), which will go into effect Oct. 28, 2004. Check 21 facilitates the use of check electronification to help promote a more efficient system of check collection and processing. It also reduces legal impediments to check truncation that exist under current law.

It works like this: Currently, when you deposit a check at your bank, the bank must present the original paper check to the paying bank, unless there is an agreement in place between the banks. Under Check 21, the paying bank is also required to accept presentment of a substitute check—a paper reproduction of the original check that contains an image of the front and back of the original check, including its magnetic ink character recognition (MICR) information.

As a result of Check 21, banks may choose to truncate original paper checks, process and deliver checks electronically, and print substitute checks at a location near the paying bank for presentment. The act does not require banks to accept checks in electronic form, nor does it require banks to create substitute checks. But it does require banks to accept substitute checks, which will serve as the legal equivalent to the original check.

How quickly banks will adopt all of the provisions of Check 21 is unknown. While all banks will need to ensure they can process substitute checks, they will need to determine whether they can make a business case for investing in the systems and processes necessary to implement check electronification. Some banks will quickly see the advantages for their business, while for other banks it may not make sense immediately.

Overall check volumes have declined over the past several years. About 40 billion checks continue to be written annually in the United States, and the Federal Reserve processes 16.5 billion of those checks. So while checks may be in decline, it is clear they are not going away overnight.

What Check 21 may mean for the Federal Reserve banks is fewer checks to process and reduced costs associated with the relatively slow and expensive check transportation network. The act may also result in an increased share of check- processing resources devoted to receiving, sorting and delivering check data and images electronically.

Says Timothy C. Brown, vice president, Check, at the St. Louis Fed: “This legislation facilitates check electronification while allowing consumers and businesses to continue using paper checks. With Check 21, we can accelerate the check-clearing process, reduce some of the risks associated with ground and air transportation, and reduce operating costs.”