Check Clearing for the 21st Century Act (Check 21)

What Is the Check Clearing for the 21st Century Act (Check 21)?

The Check Clearing for the 21st Century Act (Check 21) is a federal law that took effect on Oct. 28, 2004. It gives banks and other organizations the ability to create electronic images of consumers' checks in a process known as check truncation. The images are then sent to the relevant financial institutions to be processed, where money from a consumer's account is transferred to the receiving party's account. The electronic copy of the original check is known as a substitute check.

Understanding the Check Clearing for the 21st Century Act (Check 21)

The Check Clearing for the 21st Century Act (Check 21) aims to make use of technology to reduce or eliminate the costs involved with paper check processing. For example, the cost of physically transporting a paper check from one part of the country to another is far higher than the delivery of an image of a check across a secure network.

Under the Check 21 Act, a bank can avoid the costs of presenting paper copies of checks to the relevant banks for payment. After a predetermined holding period has elapsed, banks may destroy the original paper check. However, not all banks do this and in some cases, consumers may be able to ask for their cashed checks back for record-keeping purposes.

Under the Check 21 Act, it is not legal for anyone to use an electronic copy of a check to make a deposit into a bank account. This is a different process called remote deposit, and it has become widespread as it allows consumers to deposit checks into their bank accounts remotely via the use of a scanner or digital camera.

Check Truncation vs. Check 21

Check truncation refers to the removal of a paper check from the check processing flow in order to make an electronic copy, or substitute check, for use instead. Both sides of the paper check are scanned to make a digital copy of the check. These copies may be used to make a paper document of the substitute check (if such a document is necessary).

The process of check truncation allows banks to take advantage of the Check 21 Act, whether or not the banks upon which the truncated checks are drawn are technologically ready to send or receive substitute checks. Once a check has been truncated, banks and businesses can use either a digital copy of the check or a paper print-out of the digital document instead of the original check.

A substitute check is the legal equivalent of the original check if it clears certain hurdles. It has to accurately represent all of the information on both sides of the original check as of the time the original check was truncated; it must bear the Check 21 Act's required legal equivalence legend; and a bank has to have made the Check 21 Act warranties with respect to the substitute check.