Document Type



The Check Clearing for the 21st Century Act (the “Check 21 Act”) was introduced to Congress by the Federal Reserve System, enacted by Congress, signed by the President, and became effective on October 28, 2004.

The Check 21 Act reinforces the traditional checking system, while making some modest changes to the methods of check clearing. Mainly, the Check 21 Act introduces the concept of the “substitute check,” which could make the check clearing process somewhat faster and cheaper, assuming the Act is widely adopted by the U.S. banking system. A substitute check is a digitized image of an original paper check with a similar size and an image of the front and back of the original check. The front of a substitute check states: “This is a legal copy of your check. You can use it the same way you would use the original check.” The substitute check can be used as proof of payment just like the original check.

If a bank elects to operate under the procedures of the Check 21 Act, a customer must accept the new check clearing system; there is no element of customer choice involved. The substitute check will, however, diminish, and in some cases, entirely eliminate, security features, which banks and law enforcement have developed in order to detect fraudulent check activities such as variations in paper quality, original signatures and fingerprints.

The Check 21 Act leaves essentially intact the other basic laws governing payment by check - Articles 3 and 4 of the Uniform Commercial Code (UCC) as well as Federal Reserve Regulations J and CC (with the exception of some appropriate modifications to Regulation CC). The Act does not have an effect upon the many electronic payment devices in wide use, including credit and debit cards, Automated Clearing House payments and more.

Prior to enactment of the Check 21 Act, the legal system allowed banks to agree among themselves and with their customers to vary the check clearing system almost as they wished. Banks did not, however, adopt an electronic approach to the handling of paper checks because of the virtual impossibility of getting sufficient agreement.

Around 2000, for the first time since their use in commerce, the number and volume of check transactions had begun to decline in favor of electronic payment instruments. The Federal Reserve might have used its great prestige and authority to anoint the ongoing process of electronic payments and thereby speed modernization of the payment systems. On the contrary, the Federal Reserve did not take this direction but rather blessed the cumbersome, slow, expensive checking system.

The Check 21 Act could have some effect on U.S. payment systems only if it is actually put into broad use by the banks. Although the Act and its substitute check system became effective on October 28, 2004, there is little sign of the system being widely implemented. Little investment has been made in the expensive check image exchange and truncation equipment that will be required to implement the Act. Almost no education has been given by banks to their customer base to apprise them of what may be in store. As result, most bank customers have never heard of the Act or of its substitute checks.

Some bankers are not even convinced that the substitute check system will be an improvement on the existing check clearing system and point out the ambiguities and unanswered questions embedded in the Check 21 Act.

Ultimately, the Check 21 Act is a step in the wrong direction in the evolution of the U.S. payments system. The Federal Reserve should have allowed the antiquated checking system to continue to phase out of use. Additionally, the Fed should concentrate on developing an innovative electronic payments system and facilitate its use by consumers and businesses.

Date of Authorship for this Version

January 2005


electronic payment system, Federal Reserve, bank check, check clearing