Benefiting from Check 21 Legislation

The Check Clearing for the 21st Century Act, more commonly known as ‘Check 21’, came into effect on Oct 28th, 2004. Essentially a means of ending the slow, costly and inefficient reliance on the physical transportation of paper checks; Check 21 allows banks to transmit electronic images of the check through the clearing process. While the advantage of this legislation to banks is self-evident, what is less clear to many merchants and retailers is how they can benefit and how Check 21 will affect the way they do business .

How Check 21 Works

Check 21 works by sanctioning a legal replacement for checks, called the “substitute check,” which can be generated from a check image file when the paying bank and/or the check writer insists on receiving paper rather than electronic check images as proof that a payment occurred and was settled.
Although the Federal Reserve regulations ([] ) suggest that substitute checks must be created by the banks themselves, it does allow banks to enter into agreement with merchants to allow merchants themselves to capture check images at the point of sale and begin the truncation/electronic clearing process then. This means that Check 21 has significant advantages for businesses that accept check payments.

Advantages of Check 21

One of the primary benefits of Check 21 over other electronic check processing options, such as ACH conversion, are that all types of checks, including corporate checks, can be truncated. This means that Check 21 is not limited to retail stores and companies accepting consumer checks. Any business that accepts check payments may take advantage. Additionally, the Check 21 regulations mean that a check imaged and truncated at the point of sale continues to be covered by check law even though it clears electronically.

When checks are truncated and electronically deposited, funds are posted to the merchant’s account the very next day, even if the electronic files arrive at the bank after 9:00 pm. Combine this with the fact that businesses using Check 21 processing effectively eliminate bank runs, get earlier warning on ‘problem’ checks & can process checks as they are received and the benefits of the new Check 21 legislation become very clear.


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