Will Paper Checks Become Extinct?

When an act known as Check 21 goes into effect at the end of October, the banking industry's mounting use of image technology could turn paper checks into a memory.

The Check Clearing for the 21st Century Act, which goes into effect Oct. 28, encourages the banking industrys use of image technology to make the check-payment system more efficient and to lower check-processing costs. The law, which will change the way checks are processed and returned to the originator, covers commercial, retail, Treasury and travelers checks.

Known as Check 21, the act authorizes the creation of a new instrument, an IRD (image replacement document). An IRD is a substitute check that has been imaged from the original paper version presented to the clearing bank. It has the same legal status for proof of payment as an original check.

The IRD contains images of the front and back of the original check, including signature(s), the memo line, any endorsements and additional printed information added during the clearing process. Additional merchant-written information added to the check at the time of acceptance, such as drivers license or phone numbers, will be included in the image on the substitute check. Printed merchant audit information also will be included where applicable.

An IRD can be stored electronically, transferred electronically and then printed out whenever needed. Check 21 requires that each IRD carry the legend, "This is a legal copy of your check. Use it the same way you would use the original check."

The original paper check may be destroyed, but a digital copy will be used in transit. The copy will likely be made available by the issuing bank as a part of the monthly statement. The digital image of the check will be used to expedite the clearing process.

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Individuals and companies who currently receive canceled checks with their statements will probably not notice much change immediately. But after Oct. 28, more and more original checks will be replaced by IRDs. If your statement option already suppresses check return, you wont see any change, unless you ask for a canceled check for proof of payment. Then, youll likely receive an IRD instead.

The legislation will negatively affect courier services, since there will no longer be a requirement to deliver physical pieces of paper. In addition, float times will be reduced as funds from reciprocating banks become available within a day. Banks that adopt the new standards—which will involve an investment in technology and training—will most likely see financial and strategic advantages.

Banks will be required to honor the IRD and to comply with the re-credit requirements of the Check 21 legislation. Though theyre not required to produce or accept check images for clearing, those who do not will most likely find themselves at a disadvantage.

Quite a few suppliers are positioned to help companies ease the transition to IRD. ERAS, an international bank software and solutions development company, installed a browser-based image-clearing system for transmitting check items in Mexico earlier this year.

Using ERAS iPOD software, more than half a million checks per day are exchanged digitally nationwide. CECOBAN, a processing entity of 34 banks in Mexico, selected ERAS iPOD and iPOD/Exchange modules.

CECOBAN handles all capture, processing and balancing of transit items in Mexico. Captured images are amount keyed, repaired and balanced in Mexico City. Balanced batches are then "exchanged" by ERAS iPOD/Exchange.

ERAS offers compatibility with all existing, pertinent provisions of the Check 21 Act to all of its customers in all of its products. ERAS banks can clear with other image-clearing institutions, reducing or eliminating intermediaries with direct, digital compensations. ERAS imaging solution suite comprises 23 modules and is designed to provide banks with browser-based, cross-platform data processing systems and tools.

All My Papers irdPrint is an SDK for printing IRDs according to the X9.90 print specification. It uses the All My Papers XipPrint technology so that images are sent to the print server in a compressed format. Final composition of the output page can be delayed until it is at the point of print. The developer claims a maximum speed of more than 700 images per minute, along with security features that ensure that only licensed print servers can process the data.

In addition to IRD printing, All My Papers has added OCR-A processing to its AmpLib SDK. This means that all of the content on an IRD can be read by its check-reading software.

The Federal Reserve published a document detailing the legislative requirements for complying with Check 21. Read it here in PDF form.

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