What is Check 21?
Check 21 or "The Check Clearing for the 21st Century Act" was passed into law on October 28, 2003, and effective on October 28, 2004. Check 21 creates a new digital product called the substitute check. The substitute check has a paper reproduction of the original check's image from the front and back.
The new Check 21 act means an improvement in efficiency for the banking system. No more shipping original checks around the country. It has yet to be seen if the added savings for banks will be passed off to consumers.
What Does Check 21 Mean to My Business?
New Proof of Payment: If your business needs to confirm payment from a customer, under the new Check 21 Act a substitute check is the legal equivalent of the original and acceptable proof. The IRS can even accept the new check form as proof of payment.
Shorter Float Time: The float time is the period between the time a check is written and the time it clears. With the new efficiency in check processing times, business owners can expect checks to clear in days or even minutes. "Floating" your checks for one or two days can result in disaster:
To offset the quicker processing time, make certain the cash is in your account before you write a check. Also, ensure you have adequate account overdraft coverage until you adjust to the new system. Don't expect to get your money faster. The law doesn't amend the hold times on your account.
Change in Mailed Statements: Companies receiving original checks returned in the mail might notice a substitute check instead. Retain the substitute as if it was the original because it represents the legal equivalent.
Reduced Fraud: In theory, Check 21 can reduce losses from check fraud because the electronic check processing will help the bank receive and detect fraudulent checks earlier. It doesn't mean you should drop your guard on fraud. Just be aware another safeguard is in place.
For more information on Check 21, visit the Federal Reserve and contact your bank for details on how your account is impacted.
