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What is a substitute check and what does one look like?
Substitute checks are paper reproductions of the original checks. A substitute check is considered a legal equivalent of the original paper check if it:
- contains an image of the front and back of the original item.
- includes the MICR (magnetic ink character recognition) line of the original item with either a 4 or 5 in data position 44. This is the differentiating character between the original paper check and a substitute. A 4 indicates forward presentment and a 5 indicates a returned item.
- is suitable for automated processing in the same manner as the original check (i.e. through sorter machines).
- displays the following text on the front side of the copy "This is a legal copy of your check. You can use it the same way you would the original."
- includes information on the bank that truncated the item and the bank that converted the item to a substitute check.
A sample of a substitute check is included below. The substitute check will be about the size of a business check and has information on both sides of the document. The information on the back of the check will be printed on the back of the substitute check.
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Does Check 21 require all checks to be truncated?
No. Check 21 does not require (mandate) that all checks be truncated. The Act only allows for the production and legal equivalency of a substitute check for parties that choose to truncate the original check and replace it with a substitute check.
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How Will Check 21 Impact Your Business:
As a business customer, what changes should I expect after Check 21 becomes effective?
- A combination of original and substitute checks in your checking account statements.
- If viewing images of substitute checks through one of our image services, the image will appear smaller given the additional information displayed on the front and back of the substitute check document.
- If checks deposited are returned, you may receive a substitute check instead of the original check.
- For checks written, it's possible that banks may convert a larger dollar check to a substitute check to process more efficiently. As a result, larger dollar checks may clear faster.
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How can businesses take advantage of the new legislation?
U.S. Bank is committed to passing the benefits of Check 21 along to our customers. As our image technology evolves, new products and services will be developed that further enhance customer service. These enhancements will likely include:
- The ability to receive image statements
- More robust access to images of checks as well as deposit information through information reporting services
- The ability to download check images
- The ability to present image cash letters to U.S. Bank, rather than paper cash letters
U.S. Bank has also developed alliances with key partners in the imaging industry that will allow us to remain at the forefront of imaging and check processing as banking grows with image technology.
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Where will substitute check data be reflected on my business statements?
Business customers may notice a combination of original and substitute checks in your checking account statements. Substitute checks will be listed with the other original checks in the same section on your checking account statement.
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Will substitute checks be processed differently?
No. The bank that creates a substitute check may process the check under normal paper-based check processing procedures. U.S. Bank will:
- process the substitute check like an original check
- send the identifying information to our deposit system
- image and store in the Viewpointe archive
- handle returned substitute checks just like a normal returned item
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Is there a different processing fee for substitute checks?
No. Legislation requires banks to charge the same processing fee for substitute checks as original checks.
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Can we receive our original checks back instead of substitute checks?
U.S. Bank customers will still have the option to receive cancelled checks as part of their monthly statement. Upon implementation of Check 21, U.S. Bank customers choosing check return may begin to see a mix of original checks and substitute checks in their statements. This will occur gradually over time.
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What does the bank of first deposit (BOFD) do with an item after it is imaged?
The bank will hold the items for a period of time and then destroy the items. The exact length of time may vary by the dollar amount of the item, features on the check and agreements between the banks.
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If a substitute check is re-presented, won't the image get smaller each time it is re-imaged and processed?
No. A requirement of the Act is that the check images continue to stay the same size, and that the reconverting bank information be included on the substitute check.
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Will fraud protection features on my checks survive imaging and creation into substitute checks?
There are varied opinions on this question. Some vendors indicate that no features survive, while others indicate some features can survive. The actual result is unknown at this time. The check industry is working on developing new types of security features that will survive imaging. However, it is still prudent for customers to use check features since they do provide protection when the item is presented at a teller or merchant.
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What are the liabilities of the presenting bank if check fraud features are lost when an item is imaged?
Liabilities come into play when the bank or payor indicates that a loss has occurred because the security features of the original check did not survive, AND the dollar amount or other characteristic would have caused the bank to look at the item. At that point, the bank or customer that truncated the item and created the substitute check has the liability.
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How will Check 21 impact the availability of funds?
The impact on availability is unknown at this time. Initially, availability schedules will stay the same. As use of substitute checks increases for forward presentment, we may see changes to availability.
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U.S. Bank Readiness:
How is U.S. Bank preparing for Check 21?
As an active leader and participant in a number of industry initiatives, U.S. Bank is proactively addressing the opportunities Check 21 offers the payment industry as a whole. U.S. Bank is actively working to modify all systems to recognize and process substitute checks, in preparation for Check 21. These systems include our front-end check capture and day-two systems, such as returned items, adjustments and statements. In summary, U.S. Bank has:
Invested in image technology. A significant investment has been made in the purchase and installation of imaging hardware and software for our check capture locations. This investment will result in improvements in the timing and accuracy of front-end capture and other back-end processes, like returned items and adjustment processing.
Began archiving images for enhanced customer service. In 2002, U.S. Bank become a partner in Viewpointe, a leading provider of check and document image archiving and retrieval services. Viewpointe's constituency represents over 40% of the annual check processing volume in the United States. As of June 2004, all items processed by U.S. Bank are being placed in the Viewpointe image archive.
Started preparing for image share and image exchange. U.S. Bank and other Viewpointe banks are working on an image share program that is expected to further reduce the movement of paper. U.S. Bank is also part of Small Value Payments Company's (SVPCo) bank consortium that seeks to promote new payment systems. SVPCo is planning a pilot program designed to prepare banks to exchange image cash letters between member banks. As the payment industry continues to adapt to Check 21, U.S. Bank will be there to leverage its commitment to check electronification with innovative products and solutions that make payment processing safer, faster and more efficient.
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How is U.S. Bank communicating with customers?
To inform business customers about Check 21, U.S. Bank is providing comprehensive information to new and existing customers through various methods, including:
- in-person contacts
- mailings
- statement messaging
- usbank.com
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Check 21 and Check Conversion:
What is Check Conversion?
Check conversion is the process of converting a paper check into an Electronic Funds Transfer (EFT) transaction for clearing through the Automated Clearing House network (ACH). When a check is converted, it is removed from the check processing stream and is subject to a different set of processing rules and application regulations than that of a paper check.
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How will Check 21 impact your check conversion functionality?
In the near future, businesses will be able to deposit their check payments electronically, allowing them to select their banking relationships without having to consider geographic proximity. Currently, paper checks drawn on 1) business accounts, 2) the United States Treasury, 3) credit cards, and 4) a number of other checks continue to be ineligible for conversion into ACH transactions. However, Check 21 could help close this gap by encouraging banks to accept electronic check images for all checks. For the first time, electronic check deposits can be made without checks to follow.
At first, ineligible ACH check transactions will continue to be cleared in paper form through substitute checks. But it is assumed that the processing of substitute checks will provide the necessary business impetus to propel the exchange of electronic images between banks for the remaining check volume. As more and more financial institutions adopt image processes and begin exchanging images, critical mass may be reached making the image clearing process a less expensive alternative. ACH-based check conversion growth rates will stabilize and potentially mature as image deposit processing and exchange of images grows and captures the remaining industry check volume. The length of time it will take for image exchange to become mainstream remains speculative. Optimistic projections define it as five years, while more conservative projections predict a minimum of ten years. Some still believe it will never happen.
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What are the factors you may want to consider when deciding between check conversion and check image solutions?
The benefits of ACH check conversion include the following:
- Widespread acceptance of check conversion since the majority of banks in the United States receive ACH transactions.
- Corporate cash flow can be better managed since settlement of funds is better known for ACH transactions.
- Companies can re-present the ACH items one additional time above that allowed by Check Law. In addition, ACH items can be re-presented on pre-selected dates to increase their collectibility. ACH returns are received up to 80% faster than checks. Earlier return item information increases collection rates.
The benefits of check imaging include the following features:
- All domestic checks payments are eligible for truncation. They can be transmitted to a bank for deposit electronically.
- There are no consumer or business check truncation authorization requirements.
- Regulated by the Uniform Commercial Code, which provides better protection for companies.
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For more information about U.S. Bank and Check 21, contact your Treasury Management Sales Consultant.
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