Check 21 is the common name for the Check Clearing for the 21st Century Act. It’s new legislation that was recently passed by congress and made a law when signed by the President of the United States (remember “I’m just a bill” from Saturday morning cartoons). Check 21 basically streamlines the traditional check processing system by incorporating new electronic technology. This new system replaces an outdated check clearing system that banks and other financial institutions have used for many years. The advantage is the ability to cut the time it takes for a check to clear from days to hours.
The process to do this involves a pseudo or substitute check. Check 21 now allows banks to use this in place of original checks. The technique to make this a reality involves converting the information on the check into an electronic file, which is then sent to the maker’s financial institution for payment. This significantly speeds up the check clearing process from days to hours. The original check can even be destroyed because a substitute check can be made at any time during the process. This image can be used as a proof of payment just like an original check. In fact the checks look almost exactly like original checks except for a slightly reduced image of both the front and back of the original check.
You can expect to see a substitute check if the original check was converted to an electronic file during the payment process and the check turns out to be a bad check due to non-sufficient funds in the payee’s account. The bad check you receive will actually be the substitute check. You may also receive a substitute check if you request a copy of one of your own paid checks provided that check was converted to an electronic file during the payment process. Don’t worry the Check 21 law allows you to use the substitute check the same way as if it were the original check involved in the initial transaction or payment.
However, don’t expect a rapid rollout of electronic file conversion of checks right away. First financial establishments (such as banks and credit unions) or not required to change from paper to substitute checks due to the large upfront cost associated with investing in the equipment needed to comply with Check 21. Don’t worry though many financial institutions will gradually switch to the new system since it will save money over time on the transporting of checks, improve security and mitigate the loss associated with check fraud.
The consumers affected the most by this new change in check clearing will be those individuals that write a check one day and then attempt to transfer money into the account the next day or write a check a day earlier then they are paid via direct deposit. This method of floating money won’t be as easy to duplicate since in many cases electronic checks can clear in a little as 4 hours. So although some consumers may feel an initial wakeup call many will embrace the new act simply based on the fact that it should curtail the fraudulent activity currently seen in the financial industry.