Check Clearing To Get Electronic Overhaul

The process by which banks clear billions of checks is about to get its biggest overhaul in 50 years, thanks to legislation making its way through Congress. The Check Clearing for the 21st Century Act, Check 21 for short, would expand banks' ability to exchange electronic images of checks instead of the paper originals, saving them billions in transportation and related costs.

Today, a bank has to have a formal agreement with another bank to exchange check images. Check 21 eliminates the need for such agreements, freeing banks to transmit images at will.

The House passed the bill unanimously earlier this month, and the Senate is expected to follow shortly. Among smaller banks, Check 21 is hailed as a breakthrough. "It's a huge boost for the financial-services industry," says Rusty Cloutier, chairman of the Independent Community Bankers of America, a trade group for small banks, and president and CEO of MidSouth National Bank. "It moves banking into the electronic age."

The legislation is testimony to the paper check's popularity in the face of new forms of online and automated payment. Checks still account for 60% of all noncash retail payments.

Under current law, banks don't have to accept electronic images. Small banks that can't afford imaging force larger banks to hire air couriers to send checks across the country. Check 21 circumvents this problem by creating substitute checks, paper copies that are the legal equivalent of the original. Banks will transmit images to processing centers around the country where substitute checks can be printed and sent to recipient banks.

According to Small Value Payments Co., a bank-owned provider of E-payment services, banks will save $2.1 billion a year with image exchange.