The Evolution of Electronic Check Processing

//The Evolution of Electronic Check Processing

During much of the twentieth century, checks were the most popular method of payment among consumers in the United States. As the costs of electronic payment declined, more consumers began using electronic technology to make payments previously paid by check.

Check 21

In an effort to further reduce the costs of check processing, the Federal government enacted the Check Clearing for the 21st Century (Check 21) Act in 2003, and the law took effect in 2004. The law allows a recipient to create a digital version of a paper check, eliminating the need for further handling of the original document. This Act, which falls under the jurisdiction of the Federal Reserve, has led to rapid growth of the electronic check processing industry.

Federal Reserve Acceleration

In November 2008, the Federal Reserve announced that it would consolidate all paper check processing to two locations, Cleveland and Atlanta in a move to accelerate the restructuring of electronic check processing. Then, in February 2010, all paper check processing relocated to Cleveland. Locations that previously processed paper checks retained the ability to convert electronic check images for financial institutions that had not converted their operations to electronic check processing.

Check Usage Declines

By 2003, check usage declined to the point that electronic methods outnumbered check usage significantly. Because of this decline, there has been an increase in check conversion which allows certain checks to be converted to ACH transactions. Today, more retail checkouts create ACH transactions from check payments. In addition, the growth of the Check 21 initiative, which is different from an ACH transaction as a substitute check is processed rather than an electronic version.

Many industry insiders believe that traditional check processing will be phased out completely over the next few years and processing checks electronically will take over. Processing checks electronically reduces costs to the merchant in relation to collection fees for returned checks, as well as bank fees imposed for accepting paper checks.

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