The process of removing the paper check from its processing flow is called truncation. Paper checks continue to transition to electronic images, with almost 70% of all institutions now receiving images. In truncation, both sides of the paper check are scanned to produce a digital image. If a paper document is still needed, these images are inserted into specially formatted documents containing a photo-reduced copy of the original checks called a "substitute check".
Once a check is truncated, businesses and banks can work with either the digital image or a print reproduction of it. Images can be exchanged between member banks, savings and loans, credit unions, servicers, clearinghouses, and the Federal Reserve Bank.
Not all banks have the ability to receive image files, so there are companies who offer the service. At the item processing center, the checks are sorted by machine according to the routing/transit (RT) number as presented by the magnetic ink character recognition (MICR) line, and scanned to produce a digital image. A batch file is generated and sent to the Federal Reserve Bank or presentment point for settlement or image replacement. If a substitute check is needed, the transmitting bank is responsible for the cost of generating and transporting it from the presentment point to the Federal Reserve Bank or other corresponding bank.
Check 21 has also spawned a new bank treasury management product known as remote deposit. This process allows depositing customers the ability to capture front and rear images of checks along with their respective MICR data for those being deposited. This data is then uploaded to their depositing institution, and the customer's account is then credited. Remote deposit therefore precludes the need for merchants and other large depositors to travel to the bank (or branch) to physically make a deposit.
In addition to remote deposit, other such electronic depositing options are available to qualifying bank customers through NACHA-The Electronic Payments Association. These options include "Point of Purchase Entry" (POP) and "Back Office Conversion Entry" (BOC) for retailers, and "Accounts Receivable Entry" (ARC) for high volume remittance receivers. These transactions are not covered under the Check 21 legislation, but rather are electronic conversions of the checks' MICR data into an ACH (Automated Clearing House) debit. This can help the depositor save on the costs of transporting checks and in bank fees. However, the liability changes from Regulation CC of the Federal Reserve to Regulation E, which provides much more protection for the account being debited and therefore more risk to the merchant and originating bank.
Recently, Check 21 software providers have developed a "Virtual Check 21" system which allows online and offline merchants to create and submit demand draft documents to the bank of deposit. This process which combines remotely created checks (RCC) and Check 21 X9.37 files enables merchants to benefit from direct merchant-to-bank relationships, lower NSFs, and lower chargebacks.
Check writers may no longer be able to obtain original autographs from cancelled checks endorsed by celebrity recipients. This practice may have been used by some charities to encourage donations and may have also been used in other contexts
Read more about this topic: Check 21 Act