Fact Sheet 30:
Check 21:
Paperless Banking


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Copyright © 2004-2010
Privacy Rights Clearinghouse / UCAN
Posted October 2004

1. Introduction
2. About Check 21
3. What Check 21 Means to You
4. What You Can Do
5. “Electronic Check Conversion:” What You Need to Know
6. Tips for Check Writing in a Paperless Era
7. References

1. Introduction

When you write out a check tomorrow, chances are you will never see that check again. That’s because your bank may never get the actual check you wrote. Instead of your original checks, you may see what’s called a “substitute check,” that is, a copy of your original check

This change, which takes effect October 28, 2004, is the result of a new banking law, the Check Clearing for the 21st Century Act, or “Check 21” for short. The most immediate change you will notice is that you won’t receive copies of the cancelled checks you write each month. You will also notice that your checks clear much faster, sometimes even the same day. For the unaware consumer, Check 21, like those nasty paper cuts you get on your finger, can cause a sting.

2. About Check 21

Why was Check 21 passed by Congress?

Check 21 is viewed as a way to make check processing easier and less expensive for the financial industry. The old method requires that your check be physically moved from one point to another. For example, if you write a check to a department store, that check is deposited into the store’s bank account. The check is then physically transported, usually by truck or by air, back to your bank. The check is then “cleared,” which means the funds are taken out of your account and transferred into the store’s account.

The route is not always directly from Point A (the store) to Point B (your bank). As a minimum, checks must be processed through a Federal Reserve bank. (For more on the check clearing process and the costs of transporting checks, see www.federalreserve.gov/paymentsystems/checkservices/transcosts.htm)

Under Check 21, the check you write does not have to move beyond the store’s bank. That bank, instead of transporting your check along with thousands of others included in a days’ receipts, may transmit an electronic image of your check. With the cost of transportation, both the government and the banking industry stand to reap big savings.

Will the savings from Check 21 be passed on to me?

That’s up to your bank. The Check 21 law does not require that banks reduce your checking account fees. Consumers Union estimates that banks will save about $2 billion from Check 21. If you’d like to send a message to your bank, petitioning it for a fair shake, visit the Consumer Union web site, http://cu.convio.net/site/PageServer?pagename=Petitionthebanks&JServSessionIdr008=ave3gfyn41.app5a

Will I have to pay more when Check 21 goes into effect?

Again, Check 21 neither increases or decreases fees for banking services. However, at your bank’s discretion you may be charged for “substitute checks.” You probably already pay a fee to get your cancelled original checks. The cost to get substitute checks should not be higher, but Check 21 doesn’t limit the fee. (See Part 4 below for more on substitute checks.)

Will all banks process checks electronically after Check 21 becomes effective?

Check 21 gives banks the option of processing checks electronically. Quite likely even smaller banks will eventually use electronic processing. Check 21 requires banks to enter into written agreements to accept electronic payments rather than original checks. The process may take some time, but eventually most checks will be transmitted electronically.

3. What Check 21 Means to You

What are substitute checks?

A substitute check is a paper copy of the front and back of your original check. This copy is made by the bank that receives your payment.

What happens to my original check?

Your original check is kept by the bank that first receives it. Originals may be destroyed or kept on file, but that’s up to the receiving bank.

Can I dispute a payment using a substitute check?

Yes, according to the Federal Reserve Board, a substitute check is legally the same as your original check. A substitute check should include the statement:

This is a legal copy of your check. You can use it the same way you would use the original check.

A word of caution: Not all copies of checks are official “substitute checks.” If you get copies of your checks each month on a single page, this is called an “image statement.” It is not the same as a “substitute check” and may not carry the same legal rights.

What can I do about errors?

Check 21 creates what is called an “expedited recredit” procedure if a check is paid twice or paid for the wrong amount. Check 21 says you have a right to a refund of up to $2,500 in 10 days. In case of errors, you have to complain to your bank.

What are the disadvantages of Check 21?

First, it may not be easy to prove fraud if someone alters you check. Because “substitute checks” are copies, changes made to the original may be harder to detect. Second, you can no longer count on a “float” of a few days between the time you write a check and the time the check clears. This threatens to result in many more “bounced” checks and huge costs to consumers in overdraft charges.

Can my bank still put a hold on a check I deposit?

Yes. Check 21 does not change the hold time for your deposits. That's controlled by another law, the Expedited Check Funds Availability Act, with details spelled out in Federal Reserve Regulation CC. The Federal Reserve will study whether current hold times are reasonable under electronic banking rules. For now, the allowed hold time is generally two days for local checks. Checks drawn on the U.S. Treasury, and U.S. Postal money orders. The hold time for non-local checks is five days. For more information on deposit holds, see Regulation CC, www.federalreserve.gov/Pubs/regcc/regcc.htm.

4. What You Can Do

Can I opt-out of Check 21?

No. The choice about whether to follow Check 21 – or even whether to provide substitute checks -- is up to your bank, not you. The most you can do is shop for a bank that provides substitute checks at a reasonable cost.

How will I know about my bank’s Check 21 procedure?

If you now receive copies of your cancelled checks, your bank should send you a notice explaining about substitute checks and your rights as a customer. If you don’t get this notice, ask your bank about its practices. Also, you should specifically request that your bank provide you with substitute checks each month with your statement.

Should I get overdraft protection?

Because checks will clear more quickly under Check 21, it is easier to bounce a check. Many banks are marketing overdraft protection as a consumer protection in a paperless banking age. Overdraft plans may be marketed under consumer-friendly names like “courtesy overdraft” or “bounce protection.” But, when you consider that banks collected $11.7 billion in overdraft fees in 2003, the programs are anything but consumer-friendly.

Use caution when deciding on an overdraft protection program. The aggressive marketing of overdraft protection and the costs to consumers were discussed by the Consumer Federation of America (CFA) in testimony September 14, 2004, before the House of Representatives Committee on Financial Services.

5. Electronic Check Conversion: What You Need to Know

Check 21 is just one more step toward a paperless business world. You may have already noticed that some checks you write are never returned with your monthly account statements. That’s because checks you write can be used only as a source of information to access your account. This is allowed by the Electronic Funds Transfer Act (EFT Act), the same law that covers ATM and debit cards.

How is “electronic check conversion” different from Check 21?

Check 21 allows banks to process all payments electronically without physically sending the check from Point A to Point B. An electronic check conversion allows a merchant, a credit card company, or others who receive your checks to extract information from the check and process the payment electronically. You have to get notice that your payment will be processed electronically.

Like Check 21, electronic check conversion means your payment can be processed more quickly. If you don’t have enough money in your account at the time, you run the high risk of having the check bounce. A merchant that processes your checks electronically is required to give you notice that it is doing so. It must also notify you of fees charged for returned checks. A returned check could cost you plenty, both in fees paid to the merchant as well as overdraft fees charged by your bank

6. Tips on Check-Writing in a Paperless Era

There’s not much you can do to slow the changing world of banking. However, you can take steps to minimize your risk and avoid hefty fees that give you nothing in return.

  • Know your bank’s Check 21 practice. If you are used to getting your cancelled checks, your bank should send you a notice about “substitute checks.” If you don’t get this notice, ask.
  • Choose a bank that provides “substitute checks” at a reasonable price, and certainly at no additional cost than it previously provided original checks in the monthly statement.
  • Watch accounts closely. If you find an error, immediately notify your bank that you want a “recredit,” that is a return of your funds. Make your request in writing. Follow-up to make sure the funds have been returned in the 10 days required by Check 21.
  • Learn to live without the “float.” Expect that any check you write will clear almost immediately. Make sure you have enough funds in your account to cover any check you write.
  • Closely review your bank’s terms and fees for overdraft protection.
  • Pay by debit or credit card if you don’t like the idea of your check being processed under electronic conversion.
  • Write checks only to merchants or others you know and trust. Remember, anyone who receives a check from you also receives the information necessary to access your account.

7. References

Federal Government Sources

Consumer Guides on Check 21

Privacy Rights Clearinghouse Publications

 

 

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