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Check 21 Act

The Check Clearing for the 21st Century Act (or Check 21 Act) is a United States federal law, Pub.L. 108-100, that was enacted on October 28, 2003 by the 108th Congress. The Check 21 Act 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 or mobile phone 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, with almost 70% of all institutions now receiving images. In truncation, both sides of the paper check are scanned to produce a digital image. 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 depositors 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 "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 and may have also been used in other contexts as well. Note to international readers: The North American terminology "cancelled check" is the British equivalent of a "paid cheque". The rationale is that the cheque has been paid or drawn, and is therefore cancelled so it cannot be presented for payment again. In North America and elsewhere, paid checks, or scanned images of the checks, are returned to the payer (or made available on a bank website) so as to provide the payer with proof of payment.


There are a number of patents relating to "check collection systems", including some owned by DataTreasury. 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. There are fractious lobbying efforts on both sides of the debate and it is feared that enacting Section 14 would result in litigation against the federal government seeking compensation for a taking of private property.
The current court victories of the patent holders are "payment" based, and not "royalty" based. Although the patents are currently being upheld, the court has sold the method to the infringing bank and also set the fee. The courts have also decided that one exchange was created to shield multiple banks from lawsuit, and therefore have nullified the claim that an exchange should only pay once (but allow multiple banks to exchange). Electronic records of checks have existed since the 1950s, and tax refund checks were even printed on punched cards, yet the banks never thought to patent the idea. DataGeneral's patent would suggest that the Federal Reserve Banks are aiding and abetting all the banks in breaking DataGeneral's patent, and have been for years before the patent was issued. (The Federal Reserve Bank is both a bank and an exchange). This "infringement" would also apply to every US post office, since postal money orders are also checks that are submitted to the FED.

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