Finance Wanted.

By Jennifer L Loganathan

Check 21 or the, "Check Clearing for the 21st Century Act" is a regulation that enabled electronic check collection, processing and clearing between banks in the United States. The Federal Reserve had been investigating electronic check processing since the year 2000 with a focus on speeding up check processing and reducing transportation related delays. Through the collective efforts of industry officials and Federal Reserve staff, the act took shape and was presented before the US congress in the year 2002. The act, though signed in 2003, came into effect only from October, 2004. This act has brought in substantial changes, not only in the conventional method of check processing in United States, but also in the electronic payments industry, which was so far dominated by credit cards. The act is aimed at reducing both time and costs of physical transportation and processing of checks by using electronic images which are delivered electronically through a nationwide network of banks called ACH or Automated Clearing House. Compared to the previous standard of 3 days for a local check and around 14 days for out of town checks, a check now deposited at day 1 can be processed and cashed by the end of day.

In addition to being time consuming and expensive (considering the additional cost of transportation, particularly in outstation checks), physical transfer of paper checks is relatively more prone to theft. Check 21 Act has allowed, "check truncation" which means that the physical check is no longer required and an electronic substitute in the form of a digital image of the front and back of the check can be used for processing and payments, and is just as good as the original paper check. Such substitute digital images are also referred to as Image Replacement Documents (IRD) or echecks (electronic checks), though the term, "echecks" also encompasses several other payment options nowadays. However, to qualify as a valid e-check, the digital image has to comply with certain requirements of the Check 21 act. The substitute check must have an additional statement added to it saying, "This is a legal copy of your check. You can use it the same way you would use the original check." In addition, the substitute check must identify the account holders name and address, check number, transit code, bank information, 9 digit routing number and checking account number. Image file size of the substitute check is a critical consideration, as with the sheer number of checks in processing due to its growing popularity, banks will have to store a large number of check images for their records. In addition to storage, a larger file size will also lead to slower transmission and consequently slower processing. Banks may thus be compelled to lower the image file size, thereby lowering resolution and image quality, which may cause problems with validation of electronic checks and consequently security of the processing system.

Quicker processing will mean that there will be a much shorter time lag between the payee depositing the check and the funds clearing from the payer's bank account. Hence, "Float" may not be available, implying that the payer's funds have to be in place before the payee deposits the check. In case funds are insufficient, either party can face penalties and fines, as per the provisions of Check 21. Check 21 also provides protection to customers, in case of double deposit (where paper and electronic copies are deposited), or in case funds are deposited to or withdrawn from the incorrect account. In such cases, Check 21 provides the customer the right to have funds re-credited up to USD $2,500 per check, within 10 business days until the investigation is completed. However, this benefit applies to only those cases, in which a customer possesses a valid, "substitute check." The right to recover losses due to error or fraud covers not only the amount withdrawn, but also the fees, dues and/or penalties associated with the respective transaction. Check 21 provides these rights in view of potential problems associated with electronic check processing, such as the ones mentioned above. In addition, sometimes the digital image may not legible, causing transactional errors.

While Check 21 has increased the speed and efficiency of check processing, it has also increased the chances of check related fraud. As physical checks are minimized in electronic processing, it is harder to detect fraudulent deposits or payments. For instance, a digital image does not have the benefits of watermarks or chemically reactive paper, which are used to detect and minimize fraudulent checks. However, it has breathed new life in the usage of checks, which were on a constant decline, and created new demand for electronic checks, which are becoming increasingly popular, and are viewed by many as an excellent and low risk substitute for credit cards.

Jennifer Loganathan is the President and CEO of Stradafee Limited. Stradafee is a leading international payments company based in New York. Stradafee is a retail and electronic payments provider specializing in ecommerce and Internet merchant account solutions. Stradafee also offers high risk merchant accounts and offshore merchant account options. Stradafee can help businesses of all industries and sizes. For more information on credit card processing visit http://www.stradafee.com