Time for a Throwback – WBA staff dusted off our past publications and found some gems for your enjoyment: 

When Check 21 takes effect on Oct. 28, 2004, hundreds of bankers might follow Harry Truman's lead and place a sign on their desk saying "The Check Stops Here." 

What is Check 21?
Check 21 is short for The Check Clearing of the 21st Century Act. Check 21 authorizes financial institutions to stop shipping customers' checks back and forth to clear them and allows either the use of a new negotiable instrument called a "substitute check" or the exchanging of check images via an electronic link. 

The substitute check will be used in place of the original paper document. As a legal equivalent of the original check, it must contain an image of the front and back of the original check and display the MICR line from the original check. It must also conform to industry standards with regard to paper stock, dimensions, etc. and be suitable for automated processing. 

Electronic check imaging involves scanning checks into a system and then transmitting them via an electronic link or over the Internet. Adopting an electronic imaging method will require purchasing equipment and/or upgrading computer systems to support the process. 

How Check 21 Impacts Your Customers
Instead of taking days to clear, checks could now clear in hours. Deposit deadlines will be extended. Float will be a thing of the past. While the security benefits resulting from fewer people handling the checks include a decreased number of lost, damaged or stolen checks, as well as fewer opportunities for fraud, consumer groups have voiced some misgivings. They are concerned that with a "real" check and a "substitute" check in existence, checking accounts might be debited twice. 

Another concern is that consumers will have difficulty obtaining their canceled substitute checks, or when they do receive them, their creditors won't accept the substitutes as proof-of-payment. Consumer groups also question whether the cost-savings realized from the new automated system will reach the customer through reduced service charges. 

What Banks and Other Processors Need to Know
Although it is anticipated that Check 21 will displace many workers through the use of more automated systems where currently paper checks are read, sorted and otherwise processed, it will also eventually lead to cheaper, faster and more secure processing. Cuts in such operations' costs could conservatively save into the billions of dollars. 

Additionally, it is estimated that at least $250 million per year is now being spent on moving checks across town and the country. Check 21 could virtually eliminate the need for courier services when the switch is made to exchanging images via the Internet or an electronic link. 

Tighter Security
Because far fewer people would be involved in the processing, the number of lost, damaged or stolen checks should be greatly reduced. Criminals intent on fraud will have a smaller window of opportunity under Check 21. Banks will be able to find out sooner if an account was closed right after a check was written on it. 

Terrorists may also find it harder to undermine the payment system since planes full of checks will no longer be grounded for days, as they were after 9/11. Similarly, the impact of natural disasters on the transportation system will be less of a concern since couriers will no longer be necessary to transport the paper checks. 

Your Call: Substitute Check vs. Electronic Image
The new system is not perfect and is not yet fully supported. That's why banks aren't being required by Check 21 to accept electronic images. However, if they don't, they must accept a substitute check. The substitute check can be a two-sided photocopy, with the check slightly reduced in size to make room for a notice that says the substitute is a legal equivalent of the original. 

If the paying bank prefers not to accept an electronic image, the depositing bank can arrange to send the image to a third party near the paying bank where a substitute check is printed and then forwarded to the paying bank. In these cases, at least the cost of transporting the check across the country can be saved. The issue here is contracting with a secure third-party agency willing to print and forward the substitute check. 

Depository institutions must either buy imaging equipment or outsource such work. Meanwhile, they will have to keep two systems going—paper and electronic—until the actual transition occurs.  

The Final Word
The Fed (and a few other banks) have been successfully processing electronic images of checks for several years. Like any new idea, true efficiencies will occur only after all institutions embrace imaging—opening the door to the first real technological change in check processing in decades. 

Originally published in the July 2004 edition of the Wisconsin Banker.