With the advances in technology, check processing has changed for both banks and merchants. In the past, merchants who accepted personal checks as a form a payment were forced to record the checks on a deposit slip and take them to the bank for processing. The merchant then had to wait until the check cleared the customer’s bank before the funds were available in their account, which could take up to 10 business days. This caused cash flow problems, particularly if a check or checks were returned due to insufficient funds. Many merchants stopped taking personal checks because of the delay in receiving payment.
In 2002, companies were first permitted to capture the account information on the Magnetic Ink Character Recognition (MICR) line at the bottom of checks (www.newyorkfed.org). This data includes the account number, check number and bank routing number. By capturing this information, companies could now capture an electronic image of a customer’s check and process it through the Automated Clearing House (ACH), just like a credit or debit transaction. Initially, large companies such as utilities and credit card companies took advantage of this alternative check processing. With the passage of the Check Clearing for the 21st Century Act (Check 21) in 2004, more companies began to accept checks again.
Check 21 created a “substitute check,” which is a special copy of a paper check and the legal equivalent of the original (www.newyorkfed.org). With the passage of Check 21, the merchant is able to convert a paper check into an electronic transaction or e-check processing without depositing the check. If there are insufficient funds in the customer’s account, the business is notified so they can secure an alternative form of payment. Many POS vendors, who offer the equipment for check conversion, also offer additional software to scan for possible problems, such as previous check returns.
For companies that do business online, checks can be processed for online purchases as well. Many POS vendors offer software that enables customers to input the information from their MICR line allowing them to create an electronic check which can then be processed by the merchant as if the check was presented in person.
Check 21 and changes at the Fed have allowed businesses to once again accept personal checks with minimal drag on cash flow. Alternative check processing alleviates trips to the bank to make deposits while increasing accounting productivity.