The Background

Another barrier to all-electronic check clearing falls on October 28, when the Check Clearing for the 21st Century Act (Check 21) takes effect, and a new negotiable instrument — the substitute check — becomes the legal equivalent of an original check.

With the potential to transform transaction processing as significantly as the introduction of MICR line coding in the 1950s, Check 21 is expected to advance electronic presentment efforts and facilitate a nationwide migration to check truncation. The role of the substitute check will be to serve as a stopgap — both facilitating institutions that want to transmit images while accommodating those that do not want to accept images.

Institutions that seek to take advantage of truncation can electronically capture the critical information from a paper check, halt the processing of the paper and transmit the data or an electronic image of the check for payment. The substitute check is the solution for the paying bank that does not agree to electronic or image presentment. Where that's the case, the collecting bank may present a machine-readable paper copy of the front and back of the original and the paying bank must honor the substitute.

— Clint Swift