Check Clearing for the 21st Century Act

Check 21 Information

A significant change in the way banks and credit unions handle your checks is set to go into effect in less than one month.  For businesses and individuals, the biggest impact will be a reduction in "float" time - the length of time between when you write a check and when the money is withdrawn from your account.  The current three or four days will be reduced to one, or even the same day.

The changes are part of a new law, known as Check 21, designed to make banking more efficient.

Legislation Basics

The law, officially called the Check Clearing for the 21st Century Act, takes effect on October 28, 2004.  In additional to reducing float time, it also enables financial institutions to treat check images and "image replacements" the same as they now treat paper checks.

Currently, when a check is deposited, a bank must physically move the check to the bank of the party who wrote it in order for it to clear. Under Check 21, banks and other financial institutions have the option of creating, processing and exchanging reproductions of checks, rather than moving the actual paper.

These reproductions, called Image Replacement Documents, are produced from digitized images of the original checks. They include front-and-back images of checks; specific wording to identify them as replacement documents; bank routing numbers; check writer account numbers; and the dollar amounts of the checks, in magnetic ink along the bottom, so that the documents can be processed through check sorters.

The new law will take some of the expense and delay of paper processing and transportation out of the check system. Although banks aren't required to stop providing checks, most are expected to make the conversion once they have the technology in place because it will cut their costs. For consumers who receive original cancelled checks in their bank statements, this may mean getting a mix of paper checks and image replacements for a few months.

What Will Check Images Look Like?

Click here to view a sample of an Image Replacement Document.

Prepare to Reconcile Images Rather Than Checks

Businesses that are accustomed to receiving physical checks should prepare to use paper or electronic images for check reconciliation and other accounting purposes in the future.

Many financial Institutions have already stopped returning original checks. Some are providing the images on compact disks or through downloadable images on the internet.  Under the legislation, these images are considered legal documents for tax and other purposes.

Managing the Float Effect

Because there will be less float time on checks, bank customers and credit union members should be sure the funds are on deposit and available when writing checks. Consider arranging for overdraft protection before the new law goes into effect. In addition, be aware that although your bank may collect money faster, it probably won't positively affect deposits to your account. Under the law, banks are not obligated to shorten the holds or make depositors' funds available any sooner.

How September 11 Delayed Checks

The passage of the Check 21 law spurred in part by the 9/11 terrorists attacks.  In the aftermath of the 2001 attacks, air transportation was shut down and the movement of checks slowed dramatically.  The banking industry was forced to move paper checks by ground transportation.  During the week of September 11, the Federal Reserve reported, bank's daily check float, which is normally a few hundred million dollars, increased to more than $47 billion.

If you have any questions about the new Check 21 Law or how it will affect you, please feel free to call us.

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