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Check clearing gets expedited in new 'Check 21' federal law

November 23, 2010
A law intended to streamline the nation's check clearing processes takes effect Oct. 28. The law, nicknamed Check 21, may benefit dealers in ways they hadn't considered. The Check Clearing for the 21st Century Act, the law's proper name, allows for the truncation of paper checks. Checks can be scanned, and an electronic image replacement document (IRD) then becomes the legal substitute for the paper check, which then can be shredded. The law was created to cut down on the need to physically transport billions of checks from one place to another each year. Why Check 21? Paper processing is expensive. Trucks and airplanes are much slower than the Internet for transmitting check data, and paper check processing equipment is big and expensive. Check 21 will save banks lots of time and money. For automobile dealers and other non-bank businesses, Check 21 offers the ability to enter into a written agreement with banks to scan checks at or near the point of sale and transmit deposit information electronically to the bank. The new law can improve a dealer's bottom line in several ways: • Eliminate exposure to fraud and NSF. Merchants can quickly determine whether a check is fraudulent (written on a closed account) or NSF (written on an account with insufficient funds) by passing the check through account databases. • Eliminate trips to the bank (or courier or armored car expense). Any deposit information is sent electronically. • Enhance cash flow. Information on deposits is sent electronically, so same-day posting and funds availability eventually will be available. • Reduce clerical work. a. Electronically prepared deposits eliminate human error and reduce reconciliation time. b. No more handstamping the endorsements on every check. c. Accounts receivable software is updated automatically d. Images of checks and attendant paperwork are archived, eliminating the need to file hard copies these documents. Check 21 works thusly: When a customer writes a check, the person or company receiving it sends it to their bank. That bank, rather than sending the check back to the customer's bank for payment, will have the option of creating an electronic copy and destroying the original. The customer's bank gets that electronic version, and a new paper reproduction is created. Check 21 means that bank customers will sometimes receive one of those re-creations with their canceled checks. Checks that are transferred electronically also could clear faster, eliminating some of the "float" enjoyed by people who write checks before actually having money in their account. But widespread use of electronic checks likely won't happen immediately, said Steve Ward, executive vice president of Fiserve Inc., an information-management company for financial institutions based near Milwaukee. "Check 21 means a lot of banks are moving from the 'wait' part of 'wait and see' to a little closer to the 'see' part," he said. Editor's note: John Fancher of Data Financial contributed to this article. Date Financial has served the check and cash-processing needs of its clients for over 20 years. Contac t Fancher at 708-369-0096