Check 21 is an initial step toward more efficient and secure processing and clearing of checks by eliminating the need to transport paper checks. It is important to note that Check 21 promotes efficiency of electronic processing by creating a brand new negotiable instrument, the substitute check. A substitute check is a paper replacement check created from the electronic image of an original paper check, and is the legal equivalent of the original check. Every U.S. bank must accept substitute checks.
Virtually all checks processed through the U.S. payment system, including personal and business checks, government checks and warrants, U.S. Treasury checks, and money orders may be converted to substitute checks.
Why was Check 21 enacted?
The banking industry has been exploring electronic transmission of images of checks since 2000. Until now, the processing and collecting of checks has been totally reliant upon the smooth operation of truck and airplane transportation.
The interruption of check traffic on September 11, 2001 propelled the Federal Reserve Bank to vigorously promote legislation that resulted in Check 21. Ultimately, the impact of Check 21 will be fewer paper checks circulating through the collection processing system.
What does Check 21 require?
Check 21 is only the first step toward more efficient processing and clearing of checks. But, while it's going to make a big difference to banks, it will have little impact on most customers.
The law requires that:
How does a paper check become a substitute check?
- Banks accept and process substitute checks as the legal equivalent of original paper checks
- Banks provide notices to consumers (individuals, not businesses) explaining Check 21 and substitute checks, and indicating that paid checks returned to them after October 28, 2004 may be in the form of substitute checks
- Banks provide a new, expedited recredit procedure for consumers who suffer losses associated with a substitute check
- Everyone treat substitute checks as the legal equivalent of original checks
If another bank in the collection chain cannot process digital images of checks, that bank must be provided with a paper version of the digital image. The newly created reproduction of the original paper check is the substitute check, and the bank that created it is referred to as the “reconverting bank.”
Check 21 mandates that a substitute check is the legal equivalent of the original paper check. Because Check 21 is a federal law, it supersedes any state or local laws relating to the return of original paid paper checks.
Please note that because Check 21's effectiveness depends on clear digital images, we strongly encourage your use of plain check stock, avoiding background designs, prints, or colors. These features may interfere with a bank's ability to capture a clear image of your check. To improve the legibility of the image, the use of black ink is strongly recommended.
What information must a substitute check contain?
In order to meet the requirements of the Check 21 legislation, a substitute check must:
How does Check 21 differ from existing electronic payment processing of checks?
- Display accurate images of both the front and back of the original check
- Contain the MICR line and all endorsements, routing and transit numbers, and processing data from the original check
- Conform to specific industry standards regarding dimensions, paper stock, and other particulars
- Bear the legend, “This is a LEGAL COPY of your check. You can use it the same way you would use the original check.”
- Identify the reconverting bank
Accounts Receivable Conversion (ARC) is a process used today, whereby paper checks are converted into electronic debits and collected through the nationwide Automated Clearing House (ACH) system. These debits are governed by the Electronic Funds Transfer Act, Federal Reserve Board's Regulation E, and industry self-imposed ACH regulations, and are not covered by the Check 21 legislation.
In contrast, a substitute check is used to collect funds through the national check clearing system, and is governed by the federal Check 21 legislation and existing laws that regulate check usage. Therefore, although Check 21 encourages the electronic transmission of information, it permits the creation of a physical paper document—a substitute check—that may be processed and be used as proof of payment.
What changes will I see immediately as a Sovereign customer?
- If you are an Interactive Reporting & Initiation Services (IRIS) customer or you receive check images on CD-ROM, you will be able to view the entire image of any substitute checks received
- The checks you've written may clear faster, which may result in more frequent instances of insufficient funds
- Controlled Disbursement presentment times will not be impacted by substitute checks. However, you may notice that substitute checks reach presentment faster than original checks do today
- You may see Return Deposited Items in the form of substitute checks
- As time goes on, today's paper check security features, including watermarks, infrared ink, and paper color, will become obsolete
- Sovereign's Business Deposit Account Agreement has been amended to reflect changes associated with Check 21:
- Unless we specifically permit you to do so, you may not deposit any substitute check that has not previously been handled by a bank in the U.S. collections process. This means you cannot deposit a substitute check you create, or one that is created by another person, unless we enter into an agreement with you to do so.
- You agree not to use any checks that contain a background image that interferes with our or any other bank's ability to produce a digital image of your check. If you do, you will be responsible for any losses you or another person suffers because of the inability to produce a readable digital image of your check.
Check 21 has the potential to reduce losses associated with check fraud, as electronic collection of checks may accelerate banks' ability to receive and detect fraudulent checks.
In conjunction with Check 21, Sovereign's Positive Pay
service substantially reduces the risk of fraud. Positive Pay is a real-time, electronic comparison of checks presented for payment against your own check issue records. Unmatched items are referred to you for a payment decision.
Sovereign's Interactive Reporting & Initiation Services
(IRIS) is a Web-based product that allows you to immediately view paid checks that may be suspect, rather than discovering them when you open your account statement.
New Services for Government & Institutional Customers
In response to Check 21 legislation, Sovereign Bank has developed a variety of solutions such as Onsite Check Deposit
to allow public entities to process check deposits right from their desktops.
Frequently Asked Questions
If you have questions about Check 21, see if the answer you need is covered in these frequently asked questions