12 May 2012
Check Processing in the Age of Check 21

With increasing competition from more “sophisticated” methods of non-cash payment such as credit and debit cards, online bill payments and new smart phone payment technology, the lowly paper check is fighting off the rumors of its imminent demise. For a monetary instrument that’s been around in one form or another since the third century, paper checks are showing some tenacity in sticking around, even as the methods by which checks are processed are changing rapidly.

In the most recent Federal Reserve Payments Study (2010), checks represent less than 25 percent of all noncash payments, although the value of checks processed represents one of the largest values in payment types at almost 44 percent. So, customers still find value in using their checkbooks, especially when paying for high-dollar items.

Rapid Changes & New Technology

Traditionally, banks moved original paper checks from the bank where the checks were deposited to the bank that paid them. This process could take a few days, and was subject to issues such as transportation costs, weather delays and potential loss or damage during transit.

A major leap forward in the adoption of more efficient and cost-effective electronic check processing began in October 2004 with the Check Clearing for the 21st Century Act (Check 21). The law permitted banks to truncate original checks, to process check information electronically, and deliver substitute checks to other banks and back to customers. In truncation, the paper check is scanned to produce a digital image. These images can then be inserted into account statements as photo-reduced copies known as substitute checks or Image Replacement Documents (IRDs). These replacement check images can be used in just the same way as a cancelled paper check for recordkeeping and legal purposes. Once a check is truncated, the image can be exchanged between banks and the Federal Reserve electronically, greatly increasing the speed and efficiency of processing funds.

Over the past several years since Check 21 legislation was passed, more and more financial institutions have processed checks electronically instead of handling original checks. Currently 99.7 percent of the checks passed through the Federal Reserve are electronic.

In today’s environment, a check that started out pretty much resembling its historical predecessors may now be transformed in a few different ways: it can be converted to an IRD once the check is deposited in the bank, converted to an IRD by the presenter’s bank or simply scanned at the point of sale by the merchant and processed through the Automated Clearing House (ACH) network instead of normal check processing channels.

Although checks are losing their traditional place of dominance in the U.S. payment system, experts agree that they won’t be going away completely any time soon. According to a 2010 survey by Deluxe Corp., consumers said they want the right to choose what form of payment they use and they are not yet ready to say goodbye to their checkbooks.


Information provided is for informational purposes only.  Please contact a professional before making investment decisions.  Investment products are not insured by the FDIC; are not a deposit or other obligation of, or guaranteed by, the depositing institution; and are subject to investment risks, including possible loss of the principal amount invested.


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