What is Check 21?

The Check Clearing for the 21st Century Act, or Check 21, was an act of American legislature that was passed on October 28, 2003, and took effect a year later. Check 21 changed the way in which payments by check are processed in the United States, and streamlined communication between American banks. Banks which have chosen to use Check 21 process checks much more rapidly, effecting consumers who are in the habit of “floating” when they write checks.

"Floating" refers to writing a check when there are insufficient funds in the account. Under former check processing practices, this rarely posed a problem, because the funds would appear before the check could be processed. Perhaps someone would write a check knowing that another check was clearing, and that the funds would be deposited in time. Or, a check could be written with the knowledge that a paycheck would be received in several days, and that the paycheck could be cashed and deposited to clear the first check.

Before Check 21, if person A wrote a check to person B, person B would deposit the check in his or her bank account, and be informed that the check might take several days to clear. Bank B would send the check to Bank A, and Bank A would confirm that the check was valid, and would transfer the funds to Bank B. Several days after person B deposited the check, the funds would be deducted from person A's account, and person B's bank balance would go up.

Check 21 regulates electronic communications between banks. Now, instead of having to send a physical check to clear it, Bank B can simply send an electronic image. Bank A confirms that the check is valid and instantly transfers the funds. Using Check 21, a bank can clear a check in as little as 24 hours, rather than taking several days to do it. Bank B would keep the actual check, rather than sending it to Bank A. If person A wanted a copy of his or her canceled check, they can request a substitute check from their bank. The substitute check is an authorized electronic copy of the original check.

Consumers who get their canceled checks back from the bank with each statement can request substitute checks. Requesting substitute checks provides more consumer protections, and makes disputes much easier to resolve. In some cases, a bank account cannot be recredited if the customer does not have a substitute check. If a check clears an account twice, or an unauthorized check is written, the substitute check can be used just like the original to resolve the issue. If you are having a dispute with the bank, make sure to ask for a substitute check, not a copy, because the substitute check is a legal document which comes with unique rights and protections.

Not all banks transfer images electronically under Check 21, although all of them now create substitute checks. In some cases, a bank will create a paper substitute check and send it to the issuing bank to clear it. The original checks are kept by the bank, where they are deposited for a set period of time and then destroyed. To find out if your bank processes checks electronically or on paper, talk to your bank manager, who can also provide more information about your rights and protections under Check 21.