Check 21 Comes of Age

In October, digital images will be the legal equivalents of paper checks. Companies must get ready for the new ways banks will process payments.

The Check 21 legislation signed by the president late last October has created a slow-moving tidal wave. It will bring profound change to corporate finance operations but will give companies plenty of time to adjust. The bill legalizes the use of digital images of checks as official image replacement documents (IRDs), so it enables banks and corporations to convert a paper check to digital format and consider the electronic image file to be the legal version of the check.

By October of this year, when the law takes effect, any bank will be able to scan any check -- personal or business -- then transmit the electronic file to the paying bank and burn the paper version. It will even be possible to convert from paper check to digital check prior to deposit. Retailers, for example, will be able to truncate checks at the point of sale and transmit only the digital images to their depository bank. (See
Dawn of the E-Deposit below.)

Banks will be able to present the digital version of a check for payment anywhere nationwide within seconds. Clearing float will disappear. Settlement will, of course, accelerate. And the cost and risk of physically transporting checks will evaporate, as may some of the security devices embedded in the check stock.

"This is one of the biggest opportunities we've had in a long time to change the way we make and process payments," notes Lee Madden, senior vice president, business line manager, DDA, investments and images, at Wachovia Bank in Charlotte, N.C. "The legislation itself is fairly simple, but it opens the door to a lot of innovation. Everyone is talking about what it will mean. It's definitely the hot topic."

"The act will have a simple but profound effect on the payments business," notes Dan McCarty, senior vice president and director of treasury management services at Comerica Bank in Livonia, Mich. "This creates a bonanza of new product opportunities. And you can't choose not to play." Adds Carl Shishmanian, senior vice president for global treasury services at Bank One in Louisville, Ky., "It's not a matter of what the players want; electronic truncation of checks is where the industry is going."