MERCHANT ACCOUNTS - Credit Card Processing and Check 21.

Merchant Accounts: Check 21

What is Check 21?

Accounts Receivable Conversion (ARC): The conversion of consumer payments from checks to ACH transactions. For example, Wells Fargo Home Mortgage converts monthly payments received as checks to ACH, and destroys the original check. This creates a gap in the check sequence and means that the check won't be returned to customers in their monthly statement. ARC transactions currently appear in the "Other Withdrawals" section of the statement, along with other ACH payments. In September 2004, customers will see a clearer description of ARC transactions on their statements.

Automated Clearing House (ACH): A nationwide electronic funds transfer system that provides for interbank clearing of electronic payments for participating financial institutions. Payroll direct deposit, Social Security and tax refunds, and direct payment of mortgages and utility bills are all examples of ACH payments. 

Bank of First Deposit: The bank where a customer deposits a check.

Check Conversion: The process by which a payment originating as a consumer check is turned into an electronic ACH debit. 

Check Image: An electronic or digital image of an original check that is created by a bank or other participant in the check collection process. Check images can be exchanged electronically by banks through image exchange agreements, printed for customer statement purposes, displayed on Internet banking websites, and used to create substitute checks. 

Check 21: The Check Clearing for the 21st Century Act —which was signed into law on October 28, 2003, and went into effect a year later — makes substitute checks the legal equivalent of original checks. A substitute check is a paper reproduction of an electronic image of an original paper check. Under Check 21, the bank of first deposit (where the check is deposited) may present substitute checks instead of original checks to the paying bank (where the check is drawn). The law applies to virtually all check types. 

Check 21 seeks to: Increase the efficiency of check clearing in the United States.  Lower check processing costs and reduce the vulnerability of the check processing system to disruptions in air and ground transportation. Check 21 does not require that banks send or receive checks electronically, it simply makes substitute checks the legal equivalent of original paper checks and requires that banks accept and process them.

Check Return: The service by which customers receive cancelled checks with their statements. Most customers choose the convenience of check safekeeping, where Wells Fargo stores checks, and makes copies available on request. 

Check Truncation: The process by which an original paper check is removed from the payment-processing stream, is archived as an image and replaced by a substitute check. The original check is usually destroyed after a short time.

Float: The time elapsed between the time a check is deposited in a bank and the time the bank receives the funds. 

Image Capture: The act of reading or digitally recording a check or other document so it can be reproduced as an exact replication when needed. To create a substitute check, a bank first must image capture it.

Image Exchange: The electronic transfer of the MICR data and the front and back of an image-captured check between financial institutions for the purpose of clearing the check. Image exchange agreements must be in place between the exchanging parties.

Image Quality: The visual characteristics and readability of a check image, including the MICR line.

Image Statement: A statement that contains images of cancelled checks rather than the original cancelled paper checks.

Image Replacement Document (IRD): Another term for substitute check. The term under Check 21 is substitute check.

Magnetic Ink Character Recognition (MICR) Line: Numbers printed in magnetic ink near the bottom of the front of the check to facilitate automated processing. These numbers identify the bank the check is drawn on (the paying bank), the account number, the check number, and other information. The position and content of the MICR line are governed by industry standards.  This is in reference to the a check and not credit card processing for your merchant accounts.

Point of Purchase (POP) Conversion: This occurs when consumer check payments are converted to ACH transactions at the point of sale for merchant accounts. For example, a cashier receives a check, then scans it through a MICR machine, creating an ACH or electronic transaction to directly debit the customer's checking account, similar to credit card processing. The cashier voids the check, asks the customer to sign an authorization, and hands the check back to the customer. This process creates a gap in the check sequence, and such transactions have appeared in the "Other Withdrawals" section of the statement. Customers now see a clearer description of POP transactions on their statements. 

Position 44: The legislation states that substitute checks will use position 44 of the MICR line to identify an item as a substitute check. A “4” in that position labels it as a substitute check for forward presentment; a “5” designates it as a returned item in the form of a substitute check.

Reconverting Bank: The bank that creates a substitute check; or if a substitute check is created by an entity other than a bank, the first bank that transfers, presents or returns that substitute check. 

Substitute Check: A substitute check is a legal document, with all the rights and obligations of the original check. It's a paper copy of an electronic image of the original check, both front and back, including all endorsements, and is about the size of a business check. See example below. All substitute checks are required to include the following statement: This is a LEGAL COPY of your check. You can use it the same way you would use the original check. 

Truncate: The process by which an original paper check is removed from the payment-processing stream, is archived as an image and replaced by a substitute check. The original check is usually destroyed after a short time.

Merchant Accounts are not directly effected by Check 21 unless you accept credit cards and elect to take advantage of remote capture!

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