Check 21
Q: When did the Check 21 Act take effect?
A: The law was effective beginning October 28, 2004.
Q: Does Check 21 preempt existing law?
A: Check 21 supersedes any state or federal law that is inconsistent with this new law, including provisions of the Uniform Commercial Code.
Q: What, exactly, is check truncation?
A: Check truncation refers to any of several techniques that stop the movement of paper checks through the clearing and settlement systems.
Under Check 21, check truncation occurs when a bank or business payee captures an electronic image of a paper check and the subsequent forward and return collection processes occur through the exchange of electronic check files.
Q: What is a substitute check?
A: A substitute check is a legally sanctioned document about the size of a “business” check that can be provided to a paying bank or consumer in lieu of an original check that has been truncated along the collection stream. A substitute check is considered the legal equivalent of its original check for all purposes and reasons, including proof of payment.
A substitute check (which can be generated by a bank or its check services provider) must contain images of the front and back of the original check (complete with necessary signatures and endorsements), a statement identifying it as a substitute check and legal copy of the original and MICR encoding (which allows for the document to be handled using traditional check processing equipment).
Q: What types of checks will be eligible for truncation as a result of Check 21?
A: Any and all types of checks can be truncated and re-converted, as needed, into substitute checks.
Q: What is an IRD?
A: IRD is an acronym for Image Replacement Document. IRD is sometimes used interchangeably with substitute check.
Q: What happens to the originals of truncated checks?
A: In many cases, original checks are destroyed once the electronic (digitized) versions are created. However, some may be stored in a secure location at the discretion of the bank/merchant who digitized the checks, to be destroyed at a later date once the payments have cleared and have been posted to check writers’ accounts.
Q: What does truncation mean for bank deposit cut-offs?
A: Merchants are often constrained by narrow windows for depositing paper checks into the collection stream. Substitute checks and check image exchange push open those windows.
With modest investments on their part, business customers will be able to capture check images upon acceptance, transmitting those electronic check files to their banks 24/7. Good riddance to late-night deposit drops.
Q: How will Check 21 and truncation affect check fraud?
A: Check fraud is a serious and growing problem for merchants. Annual losses to check fraud are believed to exceed $10 billion in the retailing community. Having access to check images as soon as the items enter the collection stream mean banks (and merchant customers) can identify potential frauds early and take immediate steps to prevent losses.
