Check 21 Update

Editor's Note: Check 21 speeds up check clearing by utilizing electronic technology. Consumers will continue to write checks as usual under Check 21.

October 28, 2004 is the day that Check 21 went into affect. Not much happened that day except that it became legal for the paying bank to deduct funds from the maker's account based upon an electronic image of a check..

Check 21 Creates a New Negotiable Instrument - the Substitute Check (Sample): A substitute check starts out check that someone deposits. The bank scans it and converts it to an electronic image for transmittal to the paying bank. In most cases, the electronic version is as far as the process goes. But if the paying bank rejects the electronic image (usually for non-sufficient funds), the bank of first deposit reprints the image on a check-like piece of paper and returns it to the depositor as a substitute check. Check 21 gives the substitute check the same legal standing as the original (Sample). That is, the holder of it can do the same things with it that he could do with the original, such as re-deposit it later (a check returned as NSF can be deposited once more) or pursue legal methods of collection.

Impact of the Substitute Check: The impact of the substitute check is huge. For example, a check deposited in New York can be converted to electronic format and instantly routed to the paying bank in Los Angeles, eliminating several days of travel.

The Old Way : Banks transacted business for centuries by physically exchanging paper instruments. Computerized processing, jet airplanes and freeways sped up the paper shuffle, but the basic system had not changed. Before Check 21 physical presentment was required. A check may have logged thousands of miles in its journey from the maker to the recipient to the paying bank.

The Old Way Nearly Failed us on September 11, 2001 : Our reliance upon the physical transportation of paper nearly cost the United States its financial stability. Bundles of checks sat for days in grounded airplanes after the attacks of 9/11/2001, which meant that banks could not get paid for the checks that had passed through them. Fortunately, planes were eventually allowed to fly again and the banking system weathered the storm. However, a major weakness with our payment system was exposed.

Laws are drafted to modernize check handling: "Check Clearing for the 21st Century Act" sailed through Congress virtually unopposed. It was signed into law by President Bush on October 28, 2003 and became law October 28, 2004.

What Check 21 Means to You

• Checks you write will post to your account much faster.
• Your original check will no longer be returned to your home bank.
• You may receive a substitute check if you deposit an original that is returned for non-sufficient funds.

NSF Checks and the Substitute Check: If you deposit a check that is later returned for non-sufficient funds (NSF), SBSU will send you a substitute check that you may re-deposit one more time. If it is returned a second time as "NSF", you should deal directly with the person who gave it to you. The check cannot be re-deposited again.

What Happens to the Original Check: The original check is truncated (taken out of circulation) as soon as it is converted to electronic format. The bank or vendor that digitizes your check is responsible for its safekeeping and eventual destruction after a short holding period. Moreover, banks must take care to prevent duplicates from entering the payment stream.

Consumer protection remains strong: A customer who examines his statement and promptly reports fraudulent charges to the bank is not liable if the problem is reported within 30 days of the first statement where the fraud appeared. The 30-day clock starts when the statement is mailed by the bank. This is the same protection that has been in place for years.

Sample: Image Replacement Document (IRD).

Also knows as a "Substitute Check"

Source: Accredited Standards Committee X9, Inc.

Source: Accredited Standards Committee X9, Inc.