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What is Check 21 and how does it affect you?

Check 21 is a federal law that was implemented on October 28th, 2004 so the banking industry could process check transactions more quickly and efficiently.  Prior to its induction, checks were paper transactions that could take days, even weeks because the deposit may have been performed at one bank but had to travel to the bank that pays the check.  With so many hands touching a paper document, the cost and time involved proved astronomical.  The banking industry needed to bandage the overhead bleeding while at the same time providing better customer care through greater efficiency of transactions.

Check 21 enables banks to process bank to bank transactions electronically which virtually eliminates days worth of physical transactions.  Through new paper technology (reducing pantograph to a lower density while maintaining all security features), the depositing banks can now scan the front and back of a paper check and transmit it to the paying bank.  Instead of days and weeks this can take minutes or hours.  Your check image is available to you either on line on your bank’s website or via substitute checks.  A substitute check is a slightly larger paper copy of the front and back of your original check.  It is printed in accordance to very specific standards and must contain the verbiage “This is a legal copy of your check.  You can use it the same way you would use the original check”.  A substitute check must have been handled by a bank in order to be legal and can be used as proof of payment.

So how does Check 21 affect you?  Check 21for the most part will feel like business as usual however due to improved transaction efficiency you must be aware of your funds at all times.  No longer will you be able to “float” a check.  Check floating is a common practice where a person will write a check for a bill before their paycheck is deposited hoping that the check transit time will buy them enough time to cover the bill without bouncing the check. Many times it worked but just as many times or more it failed costing the banking industry time and money covering insufficient funds transactions.  Check floating will no longer work once all banks are transmitting electronically.  The Expedited Funds Availability Act ensures that deposited funds are available to you quickly so the maximum hold time on a deposit does not exceed the speed of which checks are cashed.  It is still wise to always know where your money is before you write a check!

Security of your documents is a concern for many customers and Check 21 is not going to increase your risk of fraud.  Digital scanning has actually been around for years and has been proven to be a safe and effective manner with which to transmit sensitive information.  Many institutions go so far as to have a signature to their transactions which further validates the electronic image.  Check 21 also has built in protection against fraudulent activity through a procedure called “expedited recredit”.  It is a refund procedure for a customer who suffers a loss as a result of an invalid substitute check or unauthorized transaction via substitute checks. 

If you are printing your checks at home, MICR or Magnetic Ink Character Recognition toner still must be used when printing your original check document.  Reason being, the banking industry still utilizes MICR scanning of check documents for sorting purposes which is separate from Check 21 which again is bank to bank electronic transmission of your check document.

To sum up, Check 21 was put in place to process paper checks more efficiently.  Efficiency in check processing saves billions of dollars and countless hours of time that was spent handling checks by hand.  Since transaction times are now minutes instead of days, you will now have to be more aware of your available funds.  It has no negative impact on check security as electronic check cashing has been around for years and Check 21 has built in protection for consumers who are victims of fraud.  If you are printing your own checks at home, continue to use MICR ink/toner so the banks can sort your checks internally.

Article Written by Kristi Remick
Advantage Laser Products, Inc.
March 8, 2006