There's a Federal law that has transformed the way that checks are being processed. "Check Clearing for the 21st Century Act" or "Check 21" as it is commonly referred to, was signed into law in October 2003 and went into effect in October 2004. The Act allows any bank, credit union, store or merchant to create a "substitute check." That's a paper or digital reproduction of the front and back of your original check, which is then taken out of circulation .

For financial institutions, the Act makes check clearing more efficient. It allows checks to be "truncated" or removed from the check processing system, and instead an electronic image is used to create a "substitute check." This substitute check is treated the same as the original check under state and federal law.

With "Check 21," financial institutions take a "picture" of your check (deposited by the person or business to whom you wrote the check) and transmit it electronically to your financial institution for posting to your account. This electronic processing may begin at the teller window, eliminating the time, cost and inefficiencies of having checks transported via truck, train or plane from all over the world for collection and return.

To give some perspective on check clearing, did you know that an estimated 42 billion checks are written in the United States each year? The journey of a check is an interesting one, starting at the time it is written to being presented for payment and finally returned to your financial institution. While much of the process is automated, there is still a lot of manual intervention and transporting of checks, leading to the possibility of errors and loss.

 

So, it's easy to see why the government is grounding the future travel plans of checks and allowing an electronic image to be treated the same as a physical check. The idea behind "Check 21" is to make the processing of checks more streamlined, thereby reducing the time it takes for checks to clear and the expense in processing checks.

What does "Check 21" mean to you? Since checks are processed quicker, this means less "float" from the time you write a draft/check until the funds are withdrawn from your account. As always, deposits should be made into your account before checks are written on those funds to make certain you have sufficient funds available to cover them and to avoid any insufficient (NSF) fees. You may get quicker access to funds from checks you deposit, too, although this law doesn't affect check hold times.

An added benefit of "Check 21" is that it lowers the risk of lost checks and check fraud. Financial institutions will no longer return canceled checks to their members/customers, so there is less possibility of these checks being intercepted by criminals for fraudulent use of your funds, credit and good name. Since credit unions have been truncating share drafts since they were introduced in the 1970’s, most credit union members are accustomed to not receiving their original drafts in their monthly statements. For others, not receiving their canceled checks along with their monthly account statements has taken some adjustment. Of course, copies of substitute checks are available upon request.

Here's a sample "substitute check". It states "This is a legal copy of your check. You can use it the same way you would use the original check."