What businesses should know about Check 21.

• Author: Chan, Leland
• Position: 21st Century Act

Spurred by the shutdown of the air transportation system after 9/11 that left hundreds of billions of dollars worth of checks sitting idle at airport tarmacs, Congress last year passed a law to modernize the nation's check payment system.

The Check Clearing for the 21st Century Act was enacted to facilitate check truncation (i.e., conversion), foster innovation and improve the efficiency of the payment system, particularly by promoting the transition from paper to electronic check processing.

Ultimately, banks, businesses and consumers will all benefit from Check 21 because checks will clear faster and the banking industry will reduce its reliance on a system of clearing checks that wastes money, burns fuel and clogs the transportation system. To many small businesses, Check 21 will mean little more than getting used to going without original cancelled checks for record-keeping purposes. For larger companies that issue or receive large numbers of checks, the changes present both opportunities and challenges.

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BACKGROUND

In its wisdom, Congress did not require banks to abandon their vast and long-standing investment in paper check processing all at once. Instead, it created a new, check-like instrument called a "substitute check," and requires all banks, businesses and consumers to accept it.

Think of a substitute check as a two-sided paper copy of the front and back of a check that, like the original, can be processed by high-speed sorters. The advantage is that a substitute check could be created from an electronic image, which means the image could be "delivered" anywhere almost instantaneously before being reconverted into a substitute check.

Of course, if the paying bank were equipped to process the check electronically, there would be no need to convert the image to a substitute check at all. But most banks have not converted, thus the need for substitute checks.

Substitute checks are expected to be used only during the industry's transition to electronic processing. The transition is inevitable because electronic processing is both faster and cheaper, and because declining paper volumes will force holdouts to upgrade. But even during the transition, clearing times will improve with the use of substitute checks.

Checks drawn on banks located on the other side of the country could be cleared on the next day after deposit rather than four or five days.

WHAT BUSINESSES CAN EXPECT

Because of Check 21, the original...