Checks Clear Faster Under ''Check 21"

December 31, 2004

Community organizations can help spread the word about a new law that may affect the way people manage their checking accounts.

The Check Clearing for the 21st Century Act (or, more simply, "Check 21") went into effect Oct. 28. It makes check processing more efficient by facilitating electronic processing and authorizing what is called a "substitute check." As a result, banking customers may find that their checks clear much faster than previously. To avoid overdraft fees, a consumer will need to be sure that there are sufficient funds in his or her account to cover that amount.

At one time, all paper checks were physically transported from the bank where deposited (often through a check clearinghouse) to the bank where the check was payable (where it would either be paid or not) and eventually sent back to the account holder, emblazoned with a chain of endorsements. The distances these checks traveled, and the time required to ship the checks, created significant processing costs. In an age of almost instantaneous transmission of electronic information, the physical transport of billions of paper checks seems hopelessly outdated. Check 21 eliminates the need to ship paper checks and makes electronic processing of checks easier. It also allows creation of a paper substitute check that contains all of the information from the original check.

How does Check 21 affect a person who writes checks? It will probably have little direct effect and may even go unnoticed. However, experts seem to agree that the most significant impact on consumers is that checks will likely be processed faster, resulting in a much quicker charge against their accounts.

Bank customers may also notice a difference in their monthly statement if they still get their original canceled checks back from the bank. Along with the original checks, customers may begin to see substitute checks taking the place of some canceled originals. Under Check 21, a substitute check is the legal equivalent of the original, when it meets certain standards. This means the substitute check can be used as proof of payment, just as if it were the original. To be legally equivalent, a substitute check must: (a) contain an accurate image of the front and back of the original check; (b) bear the legend, "This is a legal copy of your check. You can use it in the same way you would use the original check."; and (c) otherwise conform to industry and legal standards to ensure automated processing, just like an original.

Other people won't notice a difference in their monthly statements. Even before Check 21, banks were not required to provide original canceled checks to an account holder. Instead, a customer's account agreement with the bank determines whether he or she will receive canceled originals, photocopy-reduced images of canceled checks (an "image statement") or simply a listing of checks.

Regardless of what type of statement is sent, a customer may receive a substitute check in other situations, such as when a bank returns a check that was deposited to a customer's account, but "bounced."

Even if substitute checks are created during processing, existing laws prohibit a bank from charging an account more than once for the same check. The chances of such multiple charges are slight, as are other problems that may be attributed to a substitute check. Check 21 does provide special expedited recredit rights to a consumer when a substitute check is the source of the problem.

Bridges is a regular review of regional community and economic development issues. Views expressed are not necessarily those of the St. Louis Fed or Federal Reserve System.

Email Us

Media questions

All other community development questions

Back to Top