Check 21 Requirements

                                                            July 15, 2004

 After a complete research and review process of the Check 21 regulations, it has been determined that Accram Check Products are in compliance.  Accram has banking media language on file for use in the field. 

Overview - Check 21 legislation was passed unanimously by both the Senate and the House of Representatives, and has been the source of much confusion, myth, and misinformation since the day it was signed into law by President Bush on October 28, 2003.

Although legislation had been proposed as far back as 1987, the current law was a direct result of the terrorist attacks on September 11, 2001.  In the days that followed the attacks on the World Trade Center and the Pentagon, airline traffic across the country, including Federal Reserve aircraft, was grounded, bringing to a standstill the delivery of paper checks for processing between financial institutions. 

Check 21, encourages check truncation (the replacement of a paper check with a digital image) earlier in the processing cycle by removing the need to transport the original check from the bank of first deposit to the check processor, and from the check processor to the paying institution.  In order to accomplish this, the Act provides for a new negotiable document, a substitute check or Image Replace Document (IRD), and gives it the same equal legal status of the original paper checks, allowing the financial institution the option of either storing or destroying the original document once it has been captured electronically. Accram can provide you with legal Image Replacement Documents (IRD) and Substitute Checks. Click on   Image Replacement Document or call 1-800-786-0288, ext 114 for more information.

Before the passage of Check 21, check truncation could still occur, but only when an agreement was in place between the banks involved.  In the absence of an agreement, the original paper check still needed to be transported and presented for payment to the paying institution.

According to Check 21 guidelines, the substitute check will contain all of the information on both the front and back of the check, including the MICR line and all endorsements, and will also state that it is a legal copy of the original check. 

In spite of misinformation to the contrary, Check 21 requires paying banks to accept substitute checks presented for payment.  It in no way requires financial institutions to accept checks in an electronic format or to create substitute checks.

What the Act does do is allow a financial institution that want to truncate and electronically present checks for payment to do so whether or not the check paying institution is equipped to accept digital check files.

There are many banking benefits to Check 21.  First, it will allow financial institutions to process checks faster, theoretically within minutes, thereby reducing account holder float.  Secondly, it will reduce the dependence on the transportation networks needed to move checks, including the associated costs and potential disruptions.  SVPCo expects the industry to save $2.1 billion a year in check processing costs, including $200-250 million in check transportation costs from Check 21 type initiatives.  Finally, Carreker Corp. estimates operational changes brought by Check 21 and check image exchange technologies alone, could potentially save U.S. Banks about $2 billion a year if universally adopted.  In the Carreker model savings accrue from archiving checks (10%), electronic image exchange (65%) and distributed and fraud reductions (25%). 

Although the legislation does not require institutions to present and receive electronic images for payment, industry experts predict the nation’s top 25 banks to lead the way towards check truncation and become fully image-enabled by 2006.  Mid-sized banks, those with assets of $5 billion and more, are expected to follow suit and become image-capable by 2008.  Half of the nation’s small banks, with assets of $100 million or less, are expected to use check truncation and become image-enabled by 2008.

Check truncation and image capture opens up opportunities for the sale of an array of peripheral products including image statement envelopes, 3-hole drilled DDA statements, ring binders to hold the statement and check image pages, and pre-printed indexes to separate them.  Consumable products, such as MICR toner cartridges for laser printers used to print substitute checks, will also provide selling opportunities.

As the banking industry moves to image-enabled the digital capture of internal documents will follow the implementation of check truncation, necessitating the total redesign of every teller line and back room document being used by the industry.

Common Misperceptions - Check 21 allows a bank to create a new negotiable document – the substitute check (from an image of the original check) that is the legal equivalent of the original paper check.  Provided it is properly created, (according to X9.90 standards for substitute checks) the substitute check can be processed through high-speed check processing equipment and is acceptable in a court of law.

There are also things that Check 21 does not require a bank to do.  The law does not require a back to truncate checks.  Nor does it require banks to accept images in lieu of paper.  Banks also do not necessarily have to hire consultants or buy new hardware of software to deal with the new law.  They may wish to make certain expenditures to take advantage of the law’s provisions.  Basically, it’s the bank’s choice.

If a paying bank is not image enabled, Check 21 only requires that a bank accept substitute checks that are presented for payments.  What is not stated explicitly, but is implied, is that banks that exchange images of checks will have to produce substitute checks for banks that do not accept images.

 Some of the speculation in the market has been wrong.  Check 21 require that:

· Substitute checks are treated as the legal equivalents of original paper checks, in all situations and regardless of contradictory state of local laws.

· Banks provide informational notices to consumer customers explaining the legal status of substitute checks, and that paid checks provided after October 28, 2004 may actually be substitute checks.

· Banks adopt new expedited recrediting procedures for substitute checks, but only if substitute checks are actually provided to customers.

· Minor changes are made in return check processes to facilitate the handling of substitute checks.

 Here’s what Check 21 does not do.  It does not require that a bank:

            · Truncate checks.

            · Accept check image files in lieu of paper check presentments.

            · Hire a consultant to help prepare for the new law.

            · Buy any new hardware or software to deal with the new law.

            · Require the redesign of consumer or business checks.

    To contact our check 21, business check team click on  Business Checks

Questions  

1).  Are there any required changes to business and/or personal checks to comply with Check 21? 

 Response:  No, Check 21 creates the substitute check, which is an image of the source document.  The substitute check has the same legal standing as the source document checks.  ANSI is developing specs (X9.90) for the substitute check.  No changes are being made to current check specs.

2).  Does the dollar amount, check number, pay to the order, and MICR areas need to be white, meaning no panto. 

Response: No, changes to the source document are not necessary.  Check 21 is paving the way for speed of delivery, eliminating the transport of checks throughout the banking system, and a means of disaster planning.

 3).  The Federal Reserve issued a document on May 18^th discussing black and white images.  Are they referring to the actual checks or the substitute check?

 Response:  That particular document is addressing the substitute check.  This guideline resulted from discussions over the quality of the image of the substitute check, complete gray scale vs. black and white.  What consumers will see when they receive a substitute check is a gray scale version of the original check with the substitute check information in black-white resolution.  Because this is a legal document with the same legal standing as the original check, the blank-white resolution of substitute check information is clearer and less likely to result in misinterpretation.

Conclusion:

 The Check 21 regulation and the ANSI specifications are specifically written for the creation of a substitute check.  The substitute check has the same legal standing as the source document check.  It can be used in a court of law, used to prove payment, and even in States, which mandate that consumers be given cancelled checks with their bank statements (New York and Massachusetts) can receive the substitute check rather than the original check.  The substitute check information will be provided to consumers in a blank-white image resolution for easier interpretation.  Banks are not mandated to create a substitute check but are required to accept it for processing.  Banks, not consumers, are required to provide readable images of the substitute checks.

What are inferred in this research are future opportunities.  For the banking industry, Check 21 clears the way for electronic processing, eliminating current agreement barriers.  It is forecasted that the banking industry will move towards the image and digital technology with the larger banks leading the shift.  This shift will cause a realignment of current banking processes from the backroom to the teller line.  It is something to continue monitoring.

Based on the research conducted, the conclusion is that Accram’s line of check products are in compliance with Check 21.

To contact our check 21, business check team click on  Business Checks