Business Opportunities Weblog

June 10, 2004 by Dane Carlson | 0 Comments

The Federal Reserve Board: “The Check Clearing for the 21st Century Act (Check 21) was signed into law on October 28, 2003, and will become effective on October 28, 2004. Check 21 is designed to foster innovation in the payments system and to enhance its efficiency by reducing some of the legal impediments to check truncation. The law facilitates check truncation by creating a new negotiable instrument called a substitute check, which would permit banks to truncate original checks, to process check information electronically, and to deliver substitute checks to banks that want to continue receiving paper checks. A substitute check would be the legal equivalent of the original check and would include all the information contained on the original check. The law does not require banks to accept checks in electronic form nor does it require banks to use the new authority granted by the act to create substitute checks. ”

When the new law, Check 21, goes into effect October 28th it could theoretically cut the time it takes a check to clear from days to hours. Wall Street Journal has more:

In the small-business world, this change will mean several things in the months and years to come. At the simplest level, businesses will begin to have quicker access to revenue from customers who pay by check. Faster return and collection of checks was among the top benefits that businesses polled expected to see from Check 21, according to a survey by Greenwich Associates, based in Greenwich, Conn. At the same time, however, it means the checks these same businesses write to their own suppliers may also clear more quickly — decreasing the so-called float time that many entrepreneurs depend on, which was a concern noted in the same study.

Then there’s the matter of paper storage. Under Check 21, businesses (and consumers) are no longer entitled to get back their original checks, which can be destroyed. Businesses can obtain “substitute checks,” legal copies about the same size of a business check, or let banks store the copies electronically and only request one when it is needed to settle a dispute.

About two-thirds of small businesses still receive their canceled checks now, but say they don’t place a high degree of importance on retaining the originals, the Greenwich survey noted. “If I’m a small business, there’s always a storage and security issue of keeping all the checks lying around,” says Tom Kunz, director of payments and e-business for PNC Financial Services Group, based in Pittsburgh.

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