How the Check 21 Banking Law affects Customers


The Check Clearing for the 21st Century (Check 21) Act affects banking customers throughout the United States, potentially making them vulnerable to extra bank fees — and worse, unintentionally bounced checks.

This Act, designed to benefit the banking industry, is actually testament to the ongoing march of automation in the banking business, and outside of some blatant consumer-unfriendly side effects, is actually quite useful. The Act permits banks to clear checks electronically, instead of having to physically send the paper checks between institutions. It’s efficient, and saves banks a lot of money in processing costs. It also lets them clear checks presented to them almost immediately.

Because of this piece of legislation, banks no longer have to physically send paper checks to one another. They can instead create what’s called an Image Replacement Document (IRD), a digital equivalent of a check, and then destroy the original. Checks can then be transferred electronically between banks as part of the clearing process. Not only is this vastly more efficient for banks, it also allows them to institute fraud prevention measures that could, for example, electronically compare signatures on each digital check, with a customer signature on file.

Now because of this new level of automation, banks can clear checks within just a few hours. This means that consumers will no longer be able to enjoy any type of float. If you write a check, there better be money in the account at that moment–writing a check and then driving to the bank to deposit money will no longer be an option. Financial analysts say that it’s not responsible to do that anyway, and if that were the only loss to consumers, the Check 21 Act would pose no threat to banking customers. But it doesn’t end there.

Banks typically place a “hold” on deposited checks in order to allow time for them to clear. For an out of town check, this can be as long as ten business days. The Act does nothing to reduce this hold time, even though banks process the checks immediately–which means that the float that consumers lose, banks gain. In short, the bank can clear your deposit within minutes, not credit it to your account for days, and enjoy the benefit of your money in the interim period.

Another unfriendly result of Check 21 is that it will become impossible for consumers to receive their paper checks back with their statements. In fact, because some banks will still accept paper check inter-bank transfers and some will not, there’s not even any way for you to tell where your checks will be located, and how long they will be held before being destroyed.

The inevitable result, according to many studies, is that consumers will bounce more checks, and banks will earn millions more in overdraft fees. Banks will also gain another revenue stream because original checks will be destroyed–and they can then charge you whenever you want a copy of the digital image of your check.

Categories Banking

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