Check 21

Congress passed HR 1474, otherwise known as the “Check 21 Act". President George Bush signed this bill into law on October 28, 2003. HR 1474, now Public Law #108-100, will permit electronic checks to legally substitute their original paper copies in order to expedite processing. Rather than waiting for a check to be physically transported to the original institution and back, the information would be transmitted electronically. This is a change from previous check policies.

Previous check policies required banks by law to physically transmit original paper checks between financial institutions for processing. This snail mail solution resulted in what was referred to as a "float" period for checks. Check 21 resolved this issue for consumers, recipients, and banks and allows for almost immediate fund transfer as compared to the slow and cumbersome system of the past.

Certain financial institutions, which have formed independent agreements to mutually recognize electronic checks, have implemented this technology successfully. Congress recognizes the demand for wider implementation of this practice and has passed HR 1474 to grant substitute checks legal status as long as the digital image fits applicable standards. Magnetic ink in the MICR code line of checks enables ICR machines to capture check information and convert it into an electronic file for transmission.

HR 1474 was a result of consultations between the American National Standards Institute and congressional staff on the reliability and utility of electronic check standards. According to David Karmol, VP for Public Policy at the American National Standards Institute, “This legislation provides a great example of what can be accomplished when ANSI works in partnership with its accredited standards developers and supplies the appropriate information to those in government.”

Some people are concerned about the issue of the electronic image of the check being a valid tender, but to those concerned people I would note that even the Federal Reserve has jumped on the bandwagon. The Fed's implementation of X9.37, Specifications for Electronic Check Exchange, will allow the agency to exploit Magnetic Ink Character Recognition (MICR), a technology that involves the addition of black magnetic fibers into the ink of MICR code lines. Banks rely heavily on magnetic ink data to credit, sort and pay billions of checks annually. The development and implementation of a single standard MICR data format helps to reduce the cost and complexity of the nation's paper-based payment system because MICR detail would be transmitted electronically without moving paper checks. The cooperative relationship of the public and private sector in "electrifying" the check is an excellent example of the benefits to industry and consumers of government reliance on voluntary consensus standards.

Full implementation of the new check processing system is now in place.