What is Cheque 21

Posted on June 15, 2009 | What at mybiginfo.com | What is Cheque 21 | | View all What | |

Cheque 21

The U.S. government has enacted a new law, the “Check 21 Act”, that allows U.S. banks to replace an original paper check from the check payment system, capture its image electronically and then destroy the original. This electronic image will serve as a legal document for all purposes. A paper reproduction of the electronic image, a “substitute check”, will be the legal equivalent of the original paper check under U.S. State and Federal law provided that it:

(A) accurately represents all of the information on the front and back of the original check at the time it was removed from the payment system; and
(B) bears the legend “This is a LEGAL COPY of your check. You can use it the same way you would use the original check”.

Cheque clearing in the USA is manually intensive, involving multiple handling of the physical cheque. Cheque Clearing for the 21st century (Cheque 21) was passed into a law in October 2003. Cheque 21 allows for banks to truncate cheques and begin transferring their electronic images. Businesses will benefit from the rapidity of funds transfer inherent in Cheque 21. Consumers will benefit from the speed with which they can view their transactions online in a post-Cheque 21 USA. This paper discusses the history of cheque clearing, the consumer debate over Cheque 21 and technological solutions to bring chequing into the electronic age.

The Cheque 21 Act
The Check Clearing for the 21st Century Act (or Check 21 Act) is a United States federal law, Pub.L. 108-100, enacted into law October 28, 2003 by the 108th Congress. It took effect one year later, on October 28, 2004. The law allows the recipient of the original paper check to create a digital version of the original check—called a “substitute check,” thereby eliminating the need for further handling of the physical document.

Cheque Truncation
The process of removing the paper check from its processing flow is called truncation. Paper checks continue to transition to electronic images at an extraordinary rate with almost 70% of all institutions now receiving images. In truncation, both sides of the paper check are scanned to produce digital images. If a paper document is still needed, these images are inserted into specially formatted documents containing a photo-reduced copy of the original checks called a “substitute check”.

Once a check is truncated, businesses and banks can work with either the digital image or a print reproduction of it. Images can be exchanged between member banks, savings and loans, credit unions, servicers, clearinghouses, and the Federal Reserve Bank.

Not all banks have the ability to receive image files, so there are companies who offer the service. At the item processing center, the checks are sorted by machine according to the routing/transit (RT) number as presented by the magnetic ink character recognition (MICR) line, and scanned to produce a digital image. A batch file is generated and sent to the Federal Reserve Bank or presentment point for settlement or image replacement. If a substitute check is needed, the transmitting bank is responsible for the cost of generating and transporting it from the presentment point to the Federal Reserve Bank or other corresponding bank.

Check 21 has also spawned a new bank treasury management product known as remote deposit. This process allows depositing customers the ability to capture front and rear images of checks along with their respective MICR data for those being deposited. This data is then uploaded to their depositing institution, and the customer’s account is then credited. Remote deposit therefore precludes the need for merchants and other large depositers to travel to the bank (or branch) to physically make a deposit.

In addition to remote deposit, other such electronic depositing options are available to qualifying bank customers through NACHA-The Electronic Payments Association. These options include “Point of Purchase” (POP) for retailers and “Accounts Receivable Conversion” (ARC) for high volume remittance receivers. These transactions are not covered under the Check 21 legislation, but rather are electronic conversions of the checks’ MICR data into an ACH (Automated Clearing House) debit. This can help the depositor save on the costs of transporting checks and in bank fees. However, the liability changes from Regulation CC of the Federal Reserve to Regulation E, which provides much more protection for the account being debited and therefore more risk to the merchant and originating bank.

Recently, Check 21 software providers have developed a “Virtual Check 21″ system which allows online and offline merchants to create and submit demand draft documents to the bank of deposit. This process which combines remotely created checks (RCC) and Check 21 X9.37 files enables merchants to benefit from direct merchant-to-bank relationships, lower NSFs, and lower chargebacks.

Check writers may no longer be able to obtain original autographs from cancelled checks endorsed by celebrity recipients. This practice may have been used by some charities to encourage donations and may have also been used in other contexts as well. Note to international readers: The North American terminology “canceled check” is the British equivalent of a “paid cheque”. The rationale is that the cheque has been paid or drawn, and is therefore void. In North America and elsewhere, paid cheques are returned to the payer so as to provide the payer with proof of payment.

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