The Check Clearing for the 21st Century Act, aka Check 21, went into effect Thursday, moving another financial process into the digital age.
The act creates a new financial instrument, called an IRD (image replacement document). The IRD is a substitute digital document based on the scanned, original paper version. A bank now can accept the IRD, which has the same legal status for proof of payment as the original paper check. Instead of shipping physical checks all over the country as they do now, banks can know the check really is in the e-mail. .
The Check 21 legislation was prompted in part by the savings available from a digital process. But it was the 9/11 terrorist attacks that really got things moving, when millions of uncashed checks sat on airport runways for days, which slowed down the flow of commerce.
Consumers and businesses alike may need to accommodate changes coming with the legislation. Some people have relied upon the delay, or "the float," when writing checks. This is the practice of mailing payments without having sufficient funds to cover the checks and hoping that when the check is processed, there will be funds in the account.
Another emotional issue with Check 21 is the issue of archiving. Most physical checks will be destroyed, although exactly how or when has yet to be decided. Each bank will decide on its own procedure, since the disposal process wasnt mandated.
But financial industry experts warn that the conversion of paper checks to digital images could significantly reduce a banks capacity to uncover fraud or prosecute fraud. The destruction of the original paper document, eliminating evidence of fraud, may cause legal wrangling when it comes time to prosecute future check-fraud cases.
In addition, many banks plan to make digital check images available to their customers online. This could open the door to large-scale fraud, should these images ever be accessed.
For example, in a Unisys Corp. white paper, "Is Your Check 21 Implementation a Fraud Hazard?," author Ori Eisen relates how a check-fraud version of a phishing scam might work. The scam begins with a spoof e-mailing campaign intended to trick bank customers into disclosing their user names and login passwords.
Using the fraudulently obtained user names and passwords, the perpetrators could retrieve customers monthly statements and check images. Then, they could create high-quality counterfeit checks that are nearly identical in appearance, drawn for an amount that is appropriate for the account, and bearing a scanned signature.
Check out some of eWEEK.coms coverage of the Check 21 rollout and related issues here: