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Check 21 Approaches, Part I
October 4, 2004
Matt Mientka, AFP Staff Writer
This article first appeared in the AFP Exchange magazine, Sept/Oct 2004 issue.
Like Middle English, dinosaurs and the quill pen, the age-old expression "the check is in the mail" is heading for obsolescence.
Signed by President Bush and heralded with great enthusiasm from the banking community last year, the Check Clearing for the 21st Century Act (Check 21) will become effective on Oct. 28, bringing the world one step closer to a paperless banking environment. Though many say the venerable and trusted paper check will not disappear within our lifetimes, the volume of paper checks has already started to fall as more efficient and cheaper electronic payments become increasingly popular.
In the '70s, government and industry began to deposit ACH (Automatic Clearinghouse) payments directly into employee banking accounts, and today the volume of electronic money flowing annually across the country and across borders has grown by the billions.
As the next-generation Internet will have reached maturity when even the homeless are accessing services via public kiosks or cheap throwaway equipment, at least one major bank is said to be catering to illegal immigrants by offering bi-national credit cards to augment the traditional wire transfer for sending remittances home to Mexico and beyond.
Currently, most paper checks fly—not at the speed of light—but three miles or so above the earth in equally antiquated commercial aircraft, crisscrossing the country before, finally, returning to the original sender by U.S. mail. Annually, more than 40 billion paper checks are cleared the old-fashioned way.
Check 21 essentially allows banks to shoot payments at near light speed, something akin to opening a time or space warp in what once was considered the science fiction of the banking world. The new law makes it more feasible for banks to create an electronic image of an original paper check, which is then either sent to another bank for processing or is reprinted as a substitute check for the paying bank, complete with MICR (Magnetic Ink Character Recognition) line and other identifying marks.
Though banks already exchange images of checks and electronic payments, Check 21 advances the evolution of electronic payments by simply requiring banks to accept substitute checks as the legal equivalent of paper checks.
"The framers of the [Check 21] law aimed to foster innovation. That has already happened, even before the law takes effect, and while many of the technology changes are still in the making," said Denny Carreker, chairman and CEO of Carreker Corporation, a banking consultant based in Dallas.
"It’s hard to overstate the significance of widespread image processing—eliminating the constraints of time and distance and letting banks take advantage of lower-cost processing and better risk-management opportunities."
Though there are still some questions regarding the legal status of these different checks, the new law considers the substitute check—sometimes called an image replacement document, or IRD—to be the legal equivalent of the original paper check. Banks are permitted but not required to "truncate" checks and must make procedural agreements with other banks to ensure that the same check clears only once, in electronic or paper form.
Though the adoption of electronic check imaging creates greater efficiencies in banking and accounting, the impetus for the new law came on Sept. 11, 2001 when billions of dollars in payments were grounded along with all commercial aircraft in the United States. Barring a catastrophic attack against the Internet or power grid, Check 21 provides a much-needed hedge against future natural and man-made disasters from disrupting worldwide commerce.
Read Part II
Read Part III
Copyright © 2004 Association for Financial Professionals. All Rights Reserved.
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