Prior to 2004, banks had to physically transfer original paper checks from the bank holding the deposited check to the bank disbursing funds, which could take several days. This paper-based method of moving money through the U.S. Federal Reserve Bank was costly for financial institutions and inefficient for businesses. To meet these challenges, Check Clearing for the 21st Century Act, better known as Check 21, became law on October 28, 2004.
The intent of the law was to gravitate away from a paperless program toward electronic check processing by creating a negotiable instrument in digital form that is legally equivalent to an original check. Since the Expedited Funds Availability Act mandates that the Federal Reserve Board reduce capped hold times to align with the actual time to process a check, the thinking was that the increased speed of check processing as a result of Check 21 would reduce the time it takes for a check to clear.
An image replacement document (IRD), dubbed "substitute check," is the instrument replacing the paper check. A substitute check includes the front and back check image. Check 21 truncation is the process of removing the original check from the workflow and instead using a substitute check with Magnetic Ink Character Recognition (MICR). MICR is a magnetic code that makes it possible for computers and people to decipher critical data, such as routing/transit (RT) and account numbers.
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