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Check 21 Encourages Efficiency in Check Processing

Wednesday, January 1, 2003

The Check Truncation Act of 2003, also known as The Check Clearing for the 21st Century Act, or Check 21, was signed into law Oct. 28, 2003. The law will go into effect Oct. 28, 2004. Under Check 21, financial institutions will be able to create substitute checks from digital images and electronic check information, allowing them to collect and return checks more quickly. These substitute checks—not the check images themselves—will serve as the legal equivalent of the original check.

In order to be legal, the substitute checks must:

  • meet industry standards,
  • accurately and legibly include all of the information from both the front and back sides of the original check.
  • be MICR-encoded and machine readable, and
  • bear a legend that states, "This is a legal copy of your check. You can use it the same way you would use the original check."

The Act does not mandate that checks be imaged. Furthermore, it does not determine what constitutes presentment or provide legal coverage for the image exchange. And, as is the case today, banks can collect and return checks electronically only through individual agreements with other financial institutions.

Fed Chairman Alan Greenspan, speaking at a recent Fed System conference, praised Check 21 as "an important event for the financial industry." Said Greenspan, "From a broad perspective, the Check 21 Act continues the work of our society to ensure that the marketplace can respond flexibly to fundamental shifts in our technologies." In the Feditorial on page 2, First Vice President LeGrande Rives offers his thoughts about why check processing will never be the same.