A new law called the Check Clearing for the 21st Century Act, or Check 21, will affect the way bank statements look, what information is given and even how financial transaction records are maintained.

Check 21 is the product of discussions among the Federal Reserve, banks and consumer groups and the U.S. Congress. The law took effect October 28, 2004.

The Check 21 legislation had been under consideration for several years, but the terrorist attacks of September 11, 2001 served as a catalyst to accelerate the new law. For several days following the attacks, the nation’s transportation system came to a standstill, resulting in the virtual shutdown of the country’s check payments system due to its dependence on aircraft, trains and trucks to transport paper checks between banks for processing. These events demonstrated the inefficiency that existed in the check payment system and illustrated the need for a better solution.

Check 21 does something very simple, but the implications are extremely powerful. The new law creates what’s called a “substitute check” that has the same legal standing as the original check. A substitute check is a printed, paper document that carries the original check’s front and back image, plus other information, identifying it as a legal substitute. The new law enables banks to scan a paper check and capture its image electronically. The bank can then send this image very quickly through the clearing system. At the other end of the electronic process, a substitute check can be printed, if necessary. How Car Dealers and Other Businesses Benefit This means that businesses and consumers will be able to enjoy expedited deposit processing no matter where business is transacted. Plus, if a paper check is ever needed to prove a payment was made, the electronic information from the original check can be turned into the substitute check. And it can be used in exactly the same way as an original check is used today. Check 21, and the resulting truncation of checks, is not meant to make check writing obsolete. If anything, Check 21 is expected to make the check payment process more efficient and reduce risk. The process efficiencies that will be achieved through Check 21 offer several potential benefits to car dealers, including:

• Faster delivery of information – through online check images and DDA statements.

• Reduced risk of check fraud – through quicker notification of returned items.

• Improved operational continuity – despite severe weather or other disasters that may delay or halt the nation’s transportation system.

Dealer Preparation All car dealers should educate themselves about Check 21. Additionally, you will need to review your accounts payable philosophy and assess what impact a more efficient check clearing process will have on your payment and receipt strategies. For example:

• As electronic check clearing programs grow, how will a reduction in disbursement float affect my company?

• Due to reduced float, are there other payment alternatives that become more attractive, such as ACH or corporate credit cards?

• Will expedited check-clearing lead to increased non-sufficient funds (NSF) situations for my customers? Do I need to educate them about Check 21?

• Is my current check stock image compliant?

What will these substitute checks look like? They will be bigger than the usual personal check, although they are the same size as an average business check. A substitute check must meet special standards and include the same type of magnetic ink character recognition coding, also called MICR coding, that is now on checks. And it will contain all the information that appears on the checks that get returned with the bank statement. By this publication date, every bank will be required to accept substitute checks, just as they currently accept paper checks. If you currently receive canceled checks or electronic images of canceled checks with your account statement, you may be seeing substitute checks as well after that date. Check 21 may significantly help reduce check fraud, which totaled more than $4.3 million in 2001, and continues to grow, because quick detection is the key to lowering check fraud losses. Check 21 is also expected to bring quicker error resolution. The new, automated processes should result in fewer clerical errors. And in cases where it seems that an error has occurred, the expedited clearing and posting will make it possible to track down and fix the problem. Plus, under Check 21, businesses and consumers will have instant access to paid check images. Car dealers will see a change in bank statements and what is returned with that statement. Instead of actually receiving cancelled checks, statements may soon include images of the checks on the statement. In time, the convenience of check imaging will even extend to the point of sale. At the grocery store or hardware store, a small machine at the cash register will scan the paper check. The check will immediately be converted to an electronic image and transmitted for processing. Businesses will experience the benefit from the quicker processing and payment.

Vol 2, Issue 1