In less than two months, the nation will enter a new era of payments when the Check Clearing for the 21st Century Act, called Check 21 for short, takes effect Oct. 28. Check 21 allows banks that process checks—including the Fed—to convert paper checks into electronic images, which can then be cleared electronically and presented as images or as a "substitute check"—a paper print-out of the image that has the same legal standing as the original paper check.
Since the act was passed by Congress last year, the Fed has been actively preparing its check operations for the new processing environment. All Reserve banks are receiving the same standardized hardware and software to handle Check 21 services. Additionally, all Fed offices will be equipped with special printers to print the documents that will serve as substitute checks for banks unable to receive image cash letters.
Financial institutions, on the other hand, don't have to make these types of preparations immediately because the Check 21 legislation is voluntary. Banks that aren't in a position to accept image cash letters can ask for substitute checks, and there is currently no pending deadline requiring them to convert to electronics. However, for those financial institutions that plan to take advantage of electronic collection and return capabilities, the Fed will offer a full range of check processing solutions.
When the law becomes effective Oct. 28, the Fed will roll out three new product offerings designed to help financial institutions take advantage of the opportunities afforded by Check 21. These services—FedForward℠, FedReturn℠ and FedReceipt℠—will enable banks to deposit and receive image cash letters just as easily, or more so, than paper cash letters. The services feature multiple deadlines to support various customer schedules and capabilities, identical fees and deadlines nationwide, and tiered pricing.
The FedForward product suite is designed to help bankers clear dollars faster, reduce transportation and processing costs, streamline backroom operations and extend deadlines. The product suite includes a robust offering of image cash letter deposit deadlines and a large-dollar cull service for paper deposits.
The FedReturn product suite will help bankers transform their inbound and outbound returns processing operations to reduce risk, streamline backroom operations, improve quality and speed up the returns process. The product suite will include an image cash letter deposit service and, in the second quarter of 2005, derived returns and early return information to the bank of first deposit.
Financial institutions will also be able to take advantage of FedReceipt services, where the Fed will truncate paper items earlier in the collection process and provide customers with image cash letters in place of paper ones.
Although the payments landscape won't change overnight, the ability to process image cash letters will, over time, encourage new technologies that improve the efficiency of the nation's check collection system and reduce its cost. The Fed has chosen to take a leadership position in the implementation of Check 21, providing new products and services while partnering with banks to show them how to most effectively use these innovations. It's a role we plan to continue in the years to come as we fulfill our mission to foster a safe and efficient payments system.