Check 21 Act

Medical Staff

The biggest change in banking laws in over 40 years, the Check 21 Act went into effect on October 28, 2004. The revolutionary Check twenty-one (short for the Check Clearing for the 21st Century Act), was designed to enable banks to process checks faster and more efficiently.

Up until the Check Twenty-one Act went into effect, banks had to physically transfer paper checks from the banking location where the checks were originally deposited to the bank that funds them. Transporting thousands of checks everyday can be time-consuming and costly, two areas that Check 21 hoped to eliminate when it introduced the concept of “substitute checks.”

“Substitute checks,” (also known as Image replacement documents or IRDs), are legal reproductions of original checks that can be exchanged electronically between banks as digital images. Of course there are certain criteria which must be met in order for a “substitute check” to be traded as a legal document between banks. For example, each “substitute check” must have a legible image of both the front and back of the original check and show the MICR line, (the small characters printed on the bottom of each check that banks use to recognize and sort checks).

In addition, if you take a closer look at the modifications that Check twenty-one has made to the check clearing process, you will find that banks also have the ability to print the digital replacement documents once they have been funded and return them to their original owner. In other words, consumers will no longer receive their original cancelled checks in the mail after they clear their accounts, rather consumers will receive paper versions of the “substitute checks.” Therefore, in order for a “substitute (paper) check” to have the same legal standing as an original check, it must conform to general applicable industry standards.

Now that many banks have adopted the use of these “substitute checks,” consumers have had a lot of changes, positive and negative which to adjust. The first change is definitely for the better as “substitute checks” will actually reduce check fraud. Because of the tight restrictions and guidelines placed on copying original checks, banks now have an easier way to decipher between fraudulent and genuine checks. For example, if the “substitute checks” do not possess all of the criteria noted above, it would not be funded.

Perhaps the most controversial aspect of Check 21 is the change in the length of time it takes from the time a check is written to when the funds are withdrawn from your account. Before Check 21, there was an assumed ‘float time’ of 2-3 business days between the time a check was written and the time the funds would be debited from your account—A window that many consumers and businesses have taken advantage of in the past. For example, if you wrote a check on Wednesday to pay a bill, and you knew that you were going to be paid on that Friday, you would feel comfortable that sufficient funds would be in your account before your written check cleared your account.

The time it takes to clear a check was drastically reduced when banks started exchanging “substitute checks.” Check 21 eliminates the need to physically load and transport checks from one bank location to another to be funded, making the ‘float time’ practically nonexistent. In essence, paying a bill by check has become comparable to making a debit transaction at the ATM. Furthermore, the Check 21 Act does not require banks to decrease their hold time on making deposited funds available any sooner. This means that money can literally leave your checking account quicker than money can come into it.

It doesn’t take a rocket scientist to realize how these modifications will affect the way consumers make purchases throughout their daily lives. What you may not be thinking about is how the Check 21 Act affects a company’s cash flow. For the business owner, Check 21 not only affects his/her own business’ checking account, but the business is affected even more if it accepts checks as a form of payment from its customers. For instance, let’s say that a business owner receives a check from one of his clients for $12,000, and that the owner deposits the check on the same day. Let’s also say that the business owner looked over his account balance a few days later, and he noticed that the $12,000 was not added to his account. The check had been returned because the customer’s account had an insufficient funds balance. The end result is that both businesses’ cash flow have been affected by this one incident. The business owner doesn’t have his money when it was originally promised, and the client gets slapped with insufficient funds fees, which slows down productivity and decreases the company’s level of professionalism.

Unfortunately, these kinds of situations hurt small businesses whose accounts receivable are already tied up the most. For example, ABC Nurse Staffing Agency may be waiting to receive a payment on Friday, and in the meantime, ABC Staffing has to make payroll this Thursday. Before Check 21 was implemented, ABC Staffing was able to use the typical 2-3 day ‘float time-period’ to their advantage. ABC Staffing could distribute the payroll checks on Thursday as normal, knowing that the 2-3 days it would take to have the nurses’ paychecks clear their account would allow them time to receive the client’s payment. With Check 21 now in place, the agency can no longer rest easy. Not only is ABC’s cash flow tight because of slow debtor payments, but its accounts payable has turned into an even bigger hassle now that their trusty ‘float time’ has vanished.

Nicole Spiezio is a consultant liaison for PRN Funding, LLC, which is an extraordinarily focused niche player in healthcare funding. With years of experience in the healthcare industry, PRN Funding exclusively factors the accounts receivable of companies that supply goods or services to healthcare providers, such as hospitals, nursing homes, physicians’ offices, etc. Nicole can be reached toll free at 866.776.5407 and by e-mail at Contact her today to receive PRN Funding‘s consultant package, and please visit us online at to learn more about our company and what we have to offer you and your healthcare clients.

Medical Staff

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