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In the year 2000, the Federal Reserve Board began investigating a concept to promote check truncation and electronic check presentment (to remove the original paper check from the check collection or return process and replace it with an electronic image). However, it wasn’t until the tragic events that took place September 11, 2001, that urgency was felt to move forward on it as a federal law. Since a vast majority of checks are transported physically via air from one bank to another, and planes were grounded for an extended period during this time, it resulted in millions of dollars lost due to check processing being delayed. Thus, on October 28, 2003, President Bush signed a bill into law called Check 21, which takes effect on October 28, 2004.

Under current law, a bank must present the original paper check for payment unless the paying bank has agreed to accept presentment in some other form. The Uniform Commercial Code (U.C.C.) specifically authorizes banks to agree to alternative means of presentment, such as electronic presentment. However, it is not mandatory that banks receive electronic presentment, and therefore this has proven impracticable because of the unwillingness of some paying banks to do so. As a result, the payment system as a whole has not achieved the efficiencies and potential cost savings associated with handling checks electronically. It must be noted that the banking industry spends $8 billion dollars annually using the current check processing procedures and transportation.

Check 21 is a federal law that is designed to enable banks to handle more checks electronically, which should make check processing faster and more efficient. This will eliminate physically moving original paper checks from the bank where the checks are deposited to the bank that pays them. This transportation can be inefficient and costly. As stated in the previous paragraph, under current law a bank now must send the original paper check for payment unless it has an electronic payment agreement with the paying bank. Under Check 21, by authorizing the use of a new negotiable instrument called a “substitute check" (aka image replacement document), it facilitates the broader use of electronic check processing without mandating that any bank change its current check collection practices. A substitute check is a paper reproduction of an original check that contains an image of the front and back of the original check, is suitable for automated processing in the same manner as the original check, and meets other technical requirements. It is legally the same as the original check if it accurately represents the information on the original check and includes the following statement: “This is a legal copy of your check. You can use it the same way you would use the original check." For example, a bank (often the bank of first deposit) can capture a picture of the front and back of the check along with the associated payment information and transmit this information electronically to the next bank in the check processing chain. If the banks do not have an electronic presentment agreement with one another, and the receiving bank requires the original paper check, it does not have to accept the electronic presentment. However, if the electronic picture and payment information meets all the legal equivalence requirements of a substitute check, then Check 21 requires the receiving bank to accept the substitute check. While Check 21 does not require or mandate that any check be imaged and truncated, all checks are eligible for conversion to a substitute check. Although it is not known what impact Check 21 will have on October 28, 2004, it is certain that check processing will not completely convert to a substitute check environment as though with a flip of a switch. The changes Check 21 will bring will be gradual over the course of a number of years.

As a result of Check 21, banks that wish to scan the original paper check to create a substitute check will require it to be “image ready" compatible. Image readiness is the design attributes of a check that ensures optimum recognition of amounts, legibility of handwriting, and reasonably low file size. To test for Check 21/Image Readiness, QT2 has installed an Image Qualifier X97 in its facility. This is the same equipment used by banks to test for image readiness. The Image Qualifier X97, developed by RDM Corporation and approved by the ANSI X9.7 standard, will test to ensure that the entire check background is Check 21 compliant. For testing purposes a scanner is used to convert a check into a binary image. The testing will be performed to ensure minimal background clutter and high background reflectance. Excessive background clutter causes interference with the legibility of handwritten data and low background reflectance causes handwritten data to drop out due to insufficient contrast. In addition, excessive background clutter can cause huge image files, particularly for business checks because of their larger size over personal checks. Specifically, the ANSI requirements focus on the "areas of interest" for background drop out. These areas include the date, payee, signature area, legal amount, and convenience amount. By measuring a paxel count in a pre-determined area, we can determine the legibility of handwritten data. A paxel is a 3" x 3" block of black pixels (the smallest area of a document considered in capturing an electronic image). It has to be 66% complete, or at least 6 of 9 pixels in a 3 x 3 block. It has been found that individual pixels don’t constitute a legibility problem, but 3" x 3" blocks do, especially when joined together in a string. Reflectance is the relative brightness, or the amount of light reflected from each particular sample of paper or ink, as measured by an ANSI calibrated scanner, within a range of 0% to 100%. 0% is absolute black and 100% is maximum diffuse reflectance of the entire incident light. To detect background reflectance, all pixels are averaged in all possible 1/8" square areas. ANSI standard for reflectance is specified at not less than 40% in all areas of interest with the exception of the convenience amount area, which is not less than 60%. If the background area is too dark (average reflectance too low), the handwritten data will drop out due to insufficient contrast.

Regarding security with Check 21, it is nearly certain that check fraud losses will be at a high level due to the destruction of evidence of fraud upon converting the original paper check to an electronic image. Under Check 21, by utilizing as many security features as possible, an organization protects themselves with a built in indemnity claim against the converting bank if fraud occurs. Three of the highest level security features used to combat both replication and alteration are true watermarks in the paper, thermochromic inks, and chemically sensitive paper. QT2 utilizes Defensa Design paper which contains both the true watermark and chemical sensitivity within it. The thermochromic ink feature is available at a small up charge. Since there is no known image survivable security features at this time, it will be necessary for a bank to inspect the original paper check for security features prior to converting the original paper check to an electronic image or substitute check. Otherwise, the converting bank will be held liable for most or all of the check fraud loss.

QT2 can test all new or previously produced checks for Check 21/Image Ready compliance. All of our shelf laser Quick Shells have already been tested and found to be image ready. You may want to suggest to your customers to have their business checks tested in the event their bank begins to enforce the Check 21/ANSI X9.7 standard. Simply indicate on your purchase order that you wish to have the check tested for Check 21/Image Readiness. You will need to make your customer aware that their check could have a change to the aesthetic look of it in order to comply with the standard. If you have any questions regarding Check 21, please feel free to contact a QT2 Customer Service Representative.