10/27/04 — Checks to start clearing faster

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Checks to start clearing faster

By Sam Atkins
Published in News on October 27, 2004 1:59 PM

People depositing checks may soon notice the money appearing in their account quicker. That also means those who write the checks will see the money disappear faster.

Many financial institutions across the nation will be accepting digital images of checks Thursday in place of the original checks.

Currently, paper checks must be physically transported between institutions before they can be cleared. This procedure is expensive and can take several days, said Susan Barrett, operations officer with The Little Bank.

In October 2003, the Check Clearing for the 21st Century Act became law.

It is known as Check 21 and will improve the efficiency of the U.S. payment system.

Currently, someone deposits a check from their employer or whomever, and the bank processes the check and a cash letter is developed and sent to the Federal Reserve. The letter is then sent to the Federal Reserve for the paying bank and then it goes to the paying bank and the check is cleared, said Ms. Barrett.

Under Check 21, the person deposits the check like normal, but the bank makes a digital image of the check and sends an electronic cash letter down the line, and it is eventually received by the paying bank and cleared.

This will speed the process, and the money will appear in the person's account in one or two days, she added. Checks will also clear faster for those who wrote the check, which reduces float. Float is the time between when the person writes a check and the time it clears their account. The Check 21 process works the same for individual or business checks, she said.

Ms. Barrett said they have not started using image exchange, but are planning to use it in the future. As more banks start using image exchange, the trend will be for other banks to join on, she added.

If someone makes a deposit and the check is returned, they may receive a substitute check instead of the original check. The substitute check is the digital image placed back on paper. It is the legal equivalent of the original check and will include all the information contained on the original, she said. Starting Thursday, banks will be required to accept substitute checks.

Check 21 allows for a quicker clearing process which means individuals and companies will need to ensure they have sufficient funds in their account before writing a check.

People who receive original checks back with their monthly statement may receive a copy of a substitute check that the bank has accepted and cleared. Those who receive images with their statement will continue to receive them, but some of the images may be of substitute checks, added Ms. Barrett.