July, 2004

The Check Clearing for the 21st Century Act (Check Truncation Act, Check 21) was enacted on October 28,2003 (12 CFR Part 229), and becomes effective on October 28, 2004. As of that date, you won't be able to get your original paper checks back, because your bank will no longer have them. A bank other than your bank will have your original check, and will decide whether to destroy it. Before Check 21, it was your own bank that decided how long to keep your original checks, if you didn't get them returned with your statement. Now, the bank of the person you wrote the check to will be the bank that decides when to destroy your check.

Checks you write will clear sooner, increasing the risk that a check will bounce if funds are not in the account when the check is first written. Paymaster Technologies advises you not to write a check unless the funds have already been deposited and cleared, as Check 21 also abolishes the paying bank's right to demand presentment of the original paper check as a condition of payment. This allows the bank of first deposit to truncate the check upon image capture. You may not get access to the funds from checks you deposit any sooner, however, because the new law does not shorten check hold times. After 30 months, there will be a study on whether banks are making funds available to consumers earlier than required by law.

The Act is expected to speed the transition from traditional processing to imaged processing and encourage the use of electronic check clearing. National image exchange networks—a simpler, more cost effective alternative to bank-level exchange agreements—will facilitate the electronic presentment and clearing of items from the bank of first deposit to the bank of receipt. These national networks are predicted to play a major role in the new processing workflow. Banks will save money as more checks are processed electronically, but the new law does not require that any of these savings be passed on to consumers. In fact, banks will get some new opportunities to charge fees. Check 21 creates a new kind of paper copy of an electronic image of a check. This special kind of copy is called a "substitute check," (also referred to as the Image Replacement Document or IRD) and it is legally equivalent to the original check. Check 21 does not cap the fee that a bank can charge for this special copy.

Under the current law, a bank that presents a check for payment must present the original paper check unless the paying bank has agreed to accept presentment from the collecting bank in some other form. Sections of the current UCC (Uniform Commercial Code) specifically authorize banks and other persons to agree to alternative means of presentment, such as electronic presentment. However, to truncate checks early in the collection process and engage in broad-based electronic presentment, a collecting bank would need electronic presentment agreements with each bank to which it presents checks. This has proven impractical because of both the large number of paying banks and the unwillingness of some paying banks to receive electronic presentment. As a result of the difficulty in obtaining the agreements necessary to present checks electronically in all cases, banks have not been able to take full advantage of the efficiencies and potential cost savings of handling checks electronically. Once these advantages are in place, however, it is important to realize that only the special "substitute check" will be legally equivalent to the original check to prove payment. Under current law, the copies that a bank now sends to consumers under a so-called "voluntary truncation" agreement (where the consumer agrees not to get the checks back) do not legally prove that a payment has been made. Bank customers who want to maximize their rights should ask for return of "substitute checks" with checking account statements.

Although the substitute check will be legal equivalent to an original check under state and federal law, the substitute check would not be as useful as the original check for proving forgery or alteration, because it can't be used to determine pen pressure, and is less useful for handwriting analysis. For this reason, I urge you to install one of our PAYstation® products. Only PAYstation® uses inverse font technology for BOTH the amount and the payee, secured encryption, and password protection. We also offer, at no extra charge, a $100,000 Manufacturer's Certificate of Guaranty against any forgery or alteration. Please click here for more information about PAYstation®.

Robert P. Koper
President, Paymaster Technologies, Inc.