Check 21

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What is Check 21?

Check 21 is an act that allows financial institutions to digitize paper checks.

Check 21 Explained

Check 21 refers to the Check Clearing for the 21st Century Act. This Act is a federal law that went into effect on October 28, 2004.

Check 21 allows banks and other financial institutions to create electronic copies of customers’ checks. The process of creating an electronic check is called check truncation.

The electronic check itself is called a substitute check. To create it, a bank takes photos of the front and back of each check.

To complete a transaction, the bank sends the substitute check to the appropriate financial institution. Money is transferred to the recipient’s account and withdrawn from the consumer’s account, just as it would be with a paper check.

The purpose of Check 21 was to reduce the costs involved with processing paper checks. The technology involved has allowed organizations to eliminate the costs of mailing and storing checks, for example.

An added benefit of Check 21 is that check processing is now faster and more efficient. There’s also less worry about damaging or losing physical copies of checks. And electronic checks are safer because it’s less likely they’ll fall into the wrong hands.

Banks aren’t required to participate in Check 21. If they prefer, they can continue requiring customers to deposit physical checks. But today, many customers expect mobile or online check deposit options.

If you own a business, electronic checks can save you time, money, and effort. Look for a payment processor that offers electronic check processing.

Many processors offer ACH payments as well as electronic checks. The difference between the two forms of payment is that with ACH, there is no physical check or substitute check. Instead, customers provide their bank account information when they’re ready to pay. The funds are debited directly from their account and delivered to the merchant.

As a merchant, you can sign up for Check 21, ACH processing, or both, depending on your needs. Make sure you understand the pricing involved with either option.

Check 21 Examples

Have you ever deposited a check into your account using mobile or online banking? If so, you’ve taken advantage of Check 21.

It used to be the case that you had to bring every check to your bank to deposit it. Now, you can deposit your funds without leaving your house.

When you take photos of the front and back of a check, your bank verifies that the check is valid. They then use the photos to create a digital copy of your paper check. This digital copy is what’s known as a substitute check.

Your bank uses the substitute check the same way as a paper check. They debit the check writer’s financial institution for the funds and deposit them into your account.

Most banks recommend holding onto your paper check for a short time after completing a mobile deposit. For example, Wells Fargo advises customers to store checks for five days after a deposit is confirmed. After that, you should destroy your check.

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