What’s Check 21 All About?

The term “Check 21” refers to the paper-less exchange of checks via images and data, often referred to as “image exchange”. The term is derived from the name of legislation passed by Congress in 2004 to promote image exchange. When the events of September 11, 2001 caused all planes to be grounded in the U.S., it froze the exchange of paper checks and caused a significant cash-flow crisis. Congress, the Federal Reserve and the banking industry worked together to reduce that risk by fostering an all-electronic method of clearing checks between banks. While Check 21 was intended for exchange between banks, the larger banks quickly offered it to larger customers for their deposits.

How Is Check 21 Better?

Paper check deposits involved a great deal of complexity and costs that Check 21 deposits have eliminated:

• Out-Sorting Checks in First Pass

Because of the need to encode checks in a second pass, the checks had to be out-sorted in the first pass.

• Encoding Checks in Second Pass

The amounts had to be encoded in magnetic ink on the lower right corner of each check, to avoid exorbitant per-check bank fees. This required a special type of check scanner and the labor and delay involved in yet another manual scanning operation.

• Deposit Prep

The encoded checks had to be wrapped up with printed deposit reports before they were sent to the bank.

• Couriers

Courier companies were paid to transport the checks securely to the bank.

• Early Bank Deadlines

The banks required the paper checks by 3:30 to 4:30 pm for same day deposit credit. Most banks accept Check 21 deposits until 7 to 9 pm. The later deadline, especially when combined with the far shorter daily processing cycle, allows much more work to be processed each day, all but eliminating holdovers.

• High Deposit Fees

The banks charged significant fees for the manual scanning, handling and processing of paper deposits. Most banks offer lower deposit fees for Check 21 deposits, as it eliminates almost all the banks’ labor and hardware costs.

What Does Check 21 Require?

Check 21 image exchange involves the creation and transmission of specially formatted “Image Cash Letter” or ICL files. However there is a lot more to it than just a file. In order to be consistently successful the process requires meticulous attention to a number of issues:

• ICL File Formats

There are industry standards for ICL files but each bank imposes their own unique wrinkles on the file format for deposits to that bank. For example, most banks require specific non-standard values in certain fields, some banks add custom record types, and a few banks require a custom “file steering” record at the start of each file. Deposit21 supports these variants with a highly adaptable architechture.

• Encryption and Digital Signing

A number of larger banks require that ICL files be encrypted with the bank’s PGP public key and signed with the depositor’s private key. Deposit21 fully implements these capabilities which help ensure confidentiality and depositor identity.

• Transmission to the Bank

The ICL files must be transmitted to the banks’ file transfer servers using the FTP, FTPS or SFTP protocols. The logins and passwords for this must be stored securely. Deposit21 managers all this internally, with no "batch files" or external file transfer clients to compromise security or control.

• Download and Process Confirmation Files

The larger banks acknowledge each deposit file with a downloadable data file in a proprietary bank format. Deposit21 automatically downloads, decrypts and processes these files. This ensures timely notice to the A/R staff in the rare event an ICL file is not acknowledged or is rejected.

• Deposit Visibility

In a paper check environment the deposit process is visible in the form of the physical checks. In an electronic deposit environment unless the software provides full transparency the deposit process is invisible. In order to keep silent software failures from holding your cash-flow hostage, Deposit21 provides extensive dashboard task status via the web portal. All internal processes are monitored and if problems arise the software will pro-actively alert via email, text (SMS), web popup or Windows popup.

• Retry and Recovery Options

Deposit21 retries automated operations that fail when it can do so safely, but also provides comprehensive semi-automated recovery options for the remaining cases.

• Treasury Reports

The Treasury staff needs the same level of deposit reporting as with paper deposits, plus file-level reporting.