Ways to Use Check 21
Version 2 - Updated March 2004
The passage of Check 21 opens up a variety of applications in which the banks can and will create substitute checks. Below are a few examples of those applications with the identified benefits.
Remote Deposit Taking - Banks can image a check either through the teller equipment in the branch or at an ATM. That image can be transmitted to a bank's central processing unit, where a substitute check will be created and then sent for collection. This will speed the collection and therefore return of those items. Cost savings will also accrue, when banks do not have to pick up checks from the branch or ATM as frequently.
Transit and Return Clearing - Banks can image an item; transmit that image to a distant location, where a substitute check will be printed close to the bank that ultimately needs to pay the item. By transmitting the image closer to where the check is paid, the collection time for these items may decrease. The same process can be employed for returned items, speeding up the return processing and possibly reducing risks.
Return Processing - Banks receive checks for payment that are posted to their customer's accounts. When a check cannot be posted, it is returned to the depositary bank to be charged back to the depositing customer's account. For the paying bank to locate the item to be returned it must first sort through all of the checks to locate the relatively few items to be returned. With Check 21, paying banks can create substitute checks from images of checks and avoid the sorting required to find the items to be returned. In some truncation environments, the depositary bank holds the physical item and the image of the item. If electronic information is sent to the depositary bank, it can create a substitute check rather then locating the physical item again avoiding sorting many physical items.
Image Exchange/Truncation - Prior to Check 21 in order for banks to truncate checks, all parties had to agree to the truncation. Many bank customers still require their paid physical checks to be returned to them. In order to truncate checks, sending banks had to know which items could be truncated and which ones could not. While the banking industry did devise a number of methodologies to make this determination, most of them had significant cost or operational burden or both. With Check 21, banks will still need to agree to truncate checks, but all checks can be truncated without agreement. For customers requiring a physical check, the paying bank can create a substitute check. The banking industry has estimated significant savings from the truncation of checks and the exchange of images. These savings will be better realized if all checks can be truncated. Even with the expense to print the substitute checks for the customer's that require the return of the physical check the additional savings associated with truncation would be more than offset.
Point of Sale/Cash Concentration - Retail stores receive checks from their customers. Those checks are either cleared through the normal check collection process or converted into an ACH debit. Also typically retail stores or other businesses with numerous geographically disperse locations concentrate their daily proceeds by depositing the funds (check or cash) into a local depositary bank and then moving those funds typically by ACH transfer to the companies primary banking relationship. The funds generally move the day after deposit. Companies with image capabilities can image the checks and transmit those images to their corporate headquarters or their primary banking relationship. The headquarters can then transmit the images to their primary banking relationship. The bank can then either collect the items using image exchange with other image capable banks or create substitute checks for those requiring paper checks. This application is a variation on banks remote deposit taking.
Lockbox Application - Billers and corporations collect remittances today by either collecting the original paper check through the traditional check collection process or by converting the checks to ACH debits. With Check 21 remittance processors can image capture the original check and either send images to their bank or create substitute checks. The biller/processor will need an agreement with their bank to perform these services. Under the ACH only consumer checks can be collected through the ACH, while with Check 21 any check can be collected through image and/or substitute checks.