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The Check Clearing for the 21st Century Act (or Check 21 Act) is a United States federal law, Pub.L. 108-100, enacted into law October 28, 2003 by the 108th Congress. It took effect one year later, on October 28, 2004. The law allows the recipient of the original paper check to create a digital version of the original check—called a "substitute check," thereby eliminating the need for further handling of the physical document.

Consumers are most likely to see the effects of this act when they notice that certain checks (or image of) are no longer being returned to them with their monthly statement even though other checks are still being returned. Another side effect of the law is that it is now legal for anyone to use a computer scanner to capture images of checks and deposit them electronically, a process known as remote deposit.

Check 21 is not subject to ACH (Automated Clearing House) rules, therefore transactions are not subject to NACHA (The Electronic Payments Association) rules, regulations, fees and fines.



The process of removing the paper check from its processing flow is called truncation. Paper checks continue to transition to electronic images at an extraordinary rate with almost 70% of all institutions now receiving images. [1]In truncation, both sides of the paper check are scanned to produce digital images. If a paper document is still needed, these images are inserted into specially formatted documents containing a photo-reduced copy of the original checks called a "substitute check".

Once a check is truncated, businesses and banks can work with either the digital image or a print reproduction of it. Images can be exchanged between member banks, savings and loans, credit unions, servicers, clearinghouses, and the Federal Reserve Bank.

Not all banks have the ability to receive image files, so there are companies who offer the service. At the item processing center, the checks are sorted by machine according to the routing/transit (RT) number as presented by the magnetic ink character recognition (MICR) line, and scanned to produce a digital image. A batch file is generated and sent to the Federal Reserve Bank or presentment point for settlement or image replacement. If a substitute check is needed, the transmitting bank is responsible for the cost of generating and transporting it from the presentment point to the Federal Reserve Bank or other corresponding bank.

Check 21 has also spawned a new bank treasury management product known as remote deposit. This process allows depositing customers the ability to capture front and rear images of checks along with their respective MICR data for those being deposited. This data is then uploaded to their depositing institution, and the customer's account is then credited. Remote deposit therefore precludes the need for merchants and other large depositers to travel to the bank (or branch) to physically make a deposit.

In addition to remote deposit, other such electronic depositing options are available to qualifying bank customers through NACHA-The Electronic Payments Association. These options include "Point of Purchase" (POP) for retailers and "Accounts Receivable Conversion" (ARC) for high volume remittance receivers. These transactions are not covered under the Check 21 legislation, but rather are electronic conversions of the checks' MICR data into an ACH (Automated Clearing House) debit. This can help the depositor save on the costs of transporting checks and in bank fees. However, the liability changes from Regulation CC of the Federal Reserve to Regulation E, which provides much more protection for the account being debited and therefore more risk to the merchant and originating bank.

Recently, Check 21 software providers have developed a [2]"Virtual Check 21" system which allows online and offline merchants to create and submit demand draft documents to the bank of deposit. This process which combines remotely created checks (RCC) and Check 21 X9.37 files enables merchants to benefit from direct merchant-to-bank relationships, lower NSFs, and lower chargebacks.

Check writers may no longer be able to obtain original autographs from cancelled checks endorsed by celebrity recipients. This practice may have been used by some charities to encourage donations [3] and may have also been used in other contexts as well. Note to international readers: The North American terminology "canceled check" is the British equivalent of a "paid cheque". The rationale is that the cheque has been paid or drawn, and is therefore void. In North America and elsewhere, paid cheques are returned to the payer so as to provide the payer with proof of payment.


Although the act greatly reduces check processing cost for banks (in part, by eliminating the need for the costly transportation of physical checks), and speeds up the fund transfers, these benefits are not necessarily passed on to the consumers.

While the bank of deposit clears and receives the funds associated with a deposited transaction sooner than before, it may still legally hold them for a period of days specified by Expedited Funds Availability Act. During that period the funds are essentially in the bank's possession; accumulated across all the bank customers on any given day, such funds earn the bank a large amount of interest.

With some Check 21 providers, retailers will find this system to be faster as funds may be transferred much quicker than ACH. eChecks processed using a Check 21 solution are typically accepted in 1-3 seconds and clear the same day or overnight compared to typical Automated Clearing House system (ACH) time frames of 3 to 5 days.

And certain Check 21 providers can debit every US checking account, even accounts that ACH cannot such as many Credit Unions, S&Ls, small banks, brokerage accounts, business accounts and credit card check accounts.

ACH transactions take several days to clear through the system. During the clearing period the recipient has no way to determine if the transaction will clear or result in an administrative return. ACH has more than 60 reasons why a transaction can fail. Many times it is because the consumer’s bank has chosen not to participate in ACH, or hasn’t performed the correct system integration. Additionally, the fact that the funds are debited from the check issuer's account much faster than before may catch the issuer by surprise, resulting in non-sufficient funds, overdraft and a penalty in the form of NSF fee.


There are a number of patents relating to "check collection systems",[4] including some owned by DataTreasury.[5] Section 14 of the Patent Reform Act of 2007 includes provisions eliminating the right of patent holders to prevent financial institutions from using their inventions.[4] There are fractious lobbying efforts on both sides of the debate[6] and it is feared that enacting Section 14 would result in litigation against the federal government seeking compensation for a taking of private property.[4]


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