Feditorial: Check 21 Signals a Major Change in Check Processing

W. LeGrande Rives

Now that the Check Truncation Act of 2003 (Check 21) has been signed into law, check processing may never be the same. As you are well aware, our current method of check processing is both labor intensive and expensive because original checks must be repeatedly sorted before being transported to their final destination. Beginning Oct. 28, 2004, however, a "substitute check" will have the same legal status as the original and must be accepted in place of the original.

The public may not change their check-writing habits quickly. This small change in law, however, will have a significant impact on the way checks are collected and returned in the United States—replacing the sorting and transportation processes with quicker and cheaper electronic transmission of check images. If Check 21 leads to increased usage of image processing in check collection—and I have every reason to believe it will—everyone will win. Banks will reduce their costs and collect checks more quickly, and consumers will receive more conveniences such as faster availability of funds and statement deliveries.

One of the barriers that has kept this from happening under existing law is that collecting banks do not always know if the drawer of a check has agreed not to receive the original check back. Likewise, some community banks also have had difficulty obtaining the required bank-to-bank agreements for exchanging electronic information or images.

With the enactment of Check 21, more banks, I believe, will agree to exchange images because they will know that these images can be converted to paper substitute checks at any time. Banks will still need to agree on image exchange standards and allocation of liability, but broad multilateral agreements will be far more likely to develop and greater numbers of banks will likely be willing to join such agreements.

In addition, customers who don't receive their original checks might then take the next step and accept images or the information from the MICR line in their statements. None of this will happen overnight, but the end of paper-check processing just got one step closer.

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