20 Years Later: The Lasting Impact of Check 21 on the Banking Industry

October 28, 2004, will not rank highly on most people’s list of memorable dates, unless perhaps they are among the lucky few who happen to count it as a birthday or a wedding anniversary. Even within the banking industry, few will remember its significance apart from longtime operations veterans and those involved with check processing. But whether you know it or not, October 28, 2004, was a date that profoundly and permanently changed the way we move money – the day the Check Clearing for the 21st Century Act, also known as Check 21, took effect.

It was just weeks ago that we passed the 20th anniversary of that little-known date that ushered in a huge technological leap forward in banking. In many ways, it is hard to believe how much things have changed since then, and often even more difficult to comprehend the way things used to be done. We will take a look back across 20 years of Check 21 – encompassing the good, the bad, and the absurd.

Rapid refresher: How 9/11 changed the banking industry

This information might be familiar to some, but as time passes, fewer people recall the indirect connection between check payments and one of our country’s greatest disasters – the attack on the World Trade Center in New York City. Therefore, we will provide a brief recap for those who may not be aware.

It seems almost absurd by today’s standards, but back in 2001, check payments were conducted by physically exchanging the original paper check between the bank where it was deposited and check writer’s bank. Even more absurd – they used private jets to transport these checks, a network of more than fifty planes operated by the Federal Reserve Bank, as well as others by private services. In a peculiar way, this made sense because, without it, checks would have taken several days to clear. Each additional day that funds were tied up in transit collectively costing banks and their customers millions of dollars. Although inefficient, it was still less inefficient than the alternatives available at the time.

A fatal flaw with that system became evident when the events of September 11, 2001, grounded all air traffic for several days. That included the Federal Reserve check-transport jets, which meant that anyone waiting for a check payment to go through had to wait. This interruption of the banking system meant that the process needed to change to prevent possible similar future occurrences. So, in 2003, Congress passed the Check 21 Act, which made it legal for banks to exchange the scanned images of checks as the legal instrument rather than the paper documents themselves.

The scramble to get ready

The bill passed by Congress did not take effect until 2004, giving banks a full year to prepare. Still, it was clear that not everything was going to be ready on day one. According to the new law, not only were scanned images of checks given the same legal standing as the original paper document, but all banks and credit unions were required to accept the images if that is what they were given instead of paper.

Obviously, quite a few financial institutions did not have any system in place yet that could manage the full settlement process using only images. Usually, there would be a sorting machine that read the magnetic MICR codes on the checks and used that information to separate them into batches. But that still required having a paper document to read.

As an interim solution, many banks turned to substitute checks, which were copies of original checks printed out from the image. So, you still had a paper check deposited at one end and scanned, then the image sent electronically to the originating bank which would print out a second paper copy of that check for processing. It was still far from the most efficient system, but at least the physical checks no longer required physical transportation across the country, so it was a start.

There was also a bit of a scramble on the supply side, as manufacturers like us had to ramp up production in a hurry. Digital Check had already been manufacturing and selling check scanners since the mid-1990s, but they were a niche product used for archiving purposes and produced in smaller quantities. Immediately after the Check 21 Act passed, we received an order for 20,000 of a new model of scanners – and that was only from one bank. Our scanner manufacturing operation grew overnight from about half a dozen employees to more than fifty, and before long, took over our entire building and expanded into the one next door. Every manufacturer of scanners suddenly found demand for their equipment at a whole new level.

Skeptics and naysayers

Unbelievably, a lot of the media coverage and public sentiment around Check 21 was negative – they did not like the idea of going to paperless clearing. But there was a reason for that, and not just because people were stubborn and set on remaining in the financial Stone Age.

Most of the skepticism centered around float, the banking industry word for the time it took between when you wrote a check and when the funds were cleared. Back then, the float period could be several days, or even longer if you sent someone a check payment by mail. That extra float time served as a cushion if, for example, you bought groceries with a check on Thursday and payday was Friday. Or some people might write a check for more than the amount in their checking account, then move money from a savings account to cover it. It was widely practice, albeit a risky one, to write a check for something and then deposit the funds for it a day or two later.

Critics thought that the end of multi-day float times would lead to missed payments and overdrafts – a plot by the bankers and big companies to rack up “gotcha” fees. In reality, truly little of this materialized. The most common use of float tended to be for smaller day-to-day or recurring expenses, and paper checks were being replaced by debit cards and ACH transactions anyway. Whether the onslaught of debit-card overdraft fees around that time was the same is a matter open for debate, but that is a separate discussion.

Off the starting block: One scanner, or many?

As you may have surmised from the above, if few banks had complete image-handling systems in place on the receiving end, fewer still had an efficient way to scan and export check images. The usual method of processing deposited checks was to collect them all from the local branches and bring them to an operations center, run them through a room-sized sorter, then bundle them by destination and send them off by armored car. Now, there was a new possibility: What if you could put a smaller scanner at each branch, and eliminate the armored car transportation altogether?

If you wanted to do that, you had two choices: Put one big scanner at the back counter of every branch or put smaller scanners at your individual teller windows. (The first way is branch capture; the second way is teller capture.) At first, most banks opted for branch capture, mostly because there were fewer moving parts, and these systems were already in place. The perception was that besides having only one or two machines at each branch, if you used branch capture you didn’t need to train every teller how to use a scanner, and you didn’t need to “interrupt” customer transactions by stopping to scan checks; you just scanned them all in a row once or twice a day. It also more closely mirrored the old process, where checks were collected at the end of the day and shipped out.

On the other hand, one of the drawbacks about branch capture was that if you waited to scan your checks in big batches, you would not know if there reading or recognition issues with any of the checks until much later. Repairing those reading issues required a significant amount of the time. Here in 2024, problems reading check images are relatively infrequent, but with early 2000s technology, up to 20 percent of checks would fail image quality tests – usually due to bad handwriting, but sometimes also because of the item’s printed backgrounds making key information hard to read. As banks experienced this, there began a gradual move toward the teller window as the preferred point of capture.

Even though image quality and recognition software have improved quite a bit over the past 20 years, teller capture has continued to gain favor because dealing with scanned checks immediately has simply made it easier to trace and address any issues before they turn into serious ones.

Remote Deposit Capture: Cautious first steps

A side benefit of the new law was that individuals could also deposit checks electronically via digital image. The only thing that lawmakers cared about was keeping the back end clearing process between banks running – but by giving check images the same official standing as the original paper, they also technically made it legal for them to be deposited that way.

The initial reaction to this from the banks can perhaps best be described as equal parts optimism, opportunism, skepticism, and fear. Optimism and opportunism because it was obvious to most that reducing the amount of paper brought in to branches for in-person deposits could save the banks a tremendous amount of overhead – and potentially a new revenue stream if they could charge people for it. But at the same time, there was skepticism because spreading awareness was going to take effort, and fear that throwing electronic deposits to the public would open the door to mistakes, if not outright fraud.

Initially, this new remote deposit service was only offered to the largest corporate customers, who were viewed as having the lowest risk profile. These also were also customers who could justify paying for RDC, because of another issue in the early days of Check 21 …

The High Cost of Hardware

Regarding remote deposit, another barrier to entry in the early days of check scanning was the cost. Since the only ones targeted were banks and high-volume, high-end customers, the only equipment available was high-volume, high-end hardware. Nearly everything on the market in 2004 was a batch-fed scanner with a price tag of over $1,000; and even the handful of single-feed models cost just under $1,000 dollars in the early days.

For a number of years, the availability of suitable equipment was a real problem when it came to stirring up interest in RDC. While it made sense to spend a thousand dollars on a scanner if you were handling hundreds of checks or checks worth high dollar amounts every day, only a handful of businesses fit into that category. If you were taking in more like five or ten smaller checks per day, like the vast majority of businesses, that was harder to cost-justify, especially if the deposit service itself had its own associated cost (as they still do to this day). Within a few years of Check 21, over 97 percent of checks were being cleared between banks electronically, but the percentage being deposited electronically by customers via RDC was still in the low single digits.

It took a few years for the right hardware to come to market to generate this demand, and for good reason – it was a significant risk to develop it, since the market for low-cost check scanners was still uncertain. Fraud still posed a great concern as banks opened electronic deposits to progressively smaller businesses, and determining the right price point remained difficult. The greatest challenge was creating not only public awareness of and educating the public as to what RDC was and the benefits of adopting it. If they had heard about check scanning at all, it was probably because of the earlier skepticism about eliminating float time.

So, when Digital Check introduced our CheXpress CX30 model in 2008 – the first sub-$300 check scanner with a magnetic MICR reader – it was received with enthusiasm, yet still with some questions. Would a less expensive scanner really unlock the door to a larger new market? Was it even wise to go after that market? While the ensuing 15 years and nearly 1 million units sold would eventually answer those questions definitively, at the time the concerns were very real.

Finally reaching the masses

Even with more affordable equipment, there were still at least three issues that needed to be worked out to make remote deposit capture happen. First, creating demand from banks. Second, establishing attractive pricing for the hardware and service to the merchants. And third, generating awareness and reducing hurdles for adoption.

Thankfully, all the concerns about fraud with electronic check deposits simply did not manifest as anticipated. As long as scanners were still in the hands of known customers and connected to known accounts, the amount of fraud associated with remote deposit was in line with the rate of check fraud in general. So gradually, the reluctance to market it began to melt away.

Pricing also soon settled into place. Early on, the prices for remote deposit service looked very similar to those offered by the big mobile carriers – another industry with a combined hardware-service package to sell – only with apparent variations.

There were plans with monthly fees for depositing a certain number of checks; plans with no monthly fees where you paid by the item; two-year contracts with the scanner included; no-contract plans where you bought your own scanner; plans where you rented the scanner as part of the monthly fee; and countless others. With many of them, the fees were offset by earnings credits on funds deposited.

It was not any one major breakthrough that got the price where it needed to be, but just a gradual trial-and-error process that took several years, as customers gauged what the service was worth, and banks figured out what they were willing to pay. In that time the cost of the hardware also came down significantly.

That left creating awareness – which, as it turned out, proved the toughest nut to crack. Useful as it was, business RDC was just not a concept that lent itself well to mass marketing. With multiple moving parts and a lot of requirements, it was mostly the kind of thing that banks promoted internally to their own existing customer bases, with varying amounts of success. Ironically, it was a consumer product that finally got momentum going for RDC.

Mobile check capture: Bringing awareness to the masses

In 2010, PayPal became the first widely known payments service to offer check capture in its mobile app. That was a game-changer, because it finally attached electronic check deposits to a name they knew (PayPal) and a format with which they were familiar (a smartphone app). The initial PayPal offering was very much a tentative step, with relatively low dollar limits and long wait times for available funds availability, but the roadmap had been laid out. It would not be long before the major banks started to follow suit.

One of the highest-profile impacts on the launch of remote deposit into the mainstream consciousness was an ad by Chase Bank in 2012. In the 30-second spot, a newly married couple were going through their wedding gifts and snapping pictures of all the checks with their phones, thereby depositing them into the bank. It was a bit of a quirky and for a different service, but suddenly, people understood remote deposit. As a manufacturer, we can say definitively that orders for single-feed RDC scanners really started taking off around the same time.

To the present day – and beyond

Since that time, relatively little has changed about check clearing or remote deposit capture. It has been a steady march of adoption, and continuous improvements in the areas of improved read rates and enhanced fraud detection.

One of the most significant advances was the improved sharing of information within the banking industry, which effectively addressed one of the major potential avenues for fraud: duplicate deposits. Shortly after Check 21, and again with the rise of mobile apps, it became possible to deposit a check electronically and then cash the physical check at a bank branch without anyone knowing. This was due to the lack of a centralized information source to verify if an item had already been deposited. Whichever bank tried to clear the check second was out the funds. But once the industry began cooperating to share information, and with the addition of more stringent requirements like restrictive endorsements, duplicate deposits have become harder to do, whether deliberately or by accident.

Remote deposit got another brief turn in the spotlight in 2020-21, when COVID-related restrictions shuttered bank branch lobbies for extended periods of time. This led to a sudden burst of interest in electronic deposits and quite a few banks even began offering the service for free on an as-needed basis. For our part, we had quite the balancing act to meet the sudden demand for equipment while also meeting new health guidelines for keeping our factory running safely for our employees.

What does the future hold for the Chek 21 Act? Most likely, much of the same. Nearly all checks are settled electronically now, and chances are, if a business could use remote deposit capture, they’ve heard of it. We will probably see continued usage tied to overall check volume; we imagine with few surprises.

Finally, while we are on that subject – another unseen side effect of Check 21 has almost certainly been to prolong the lifespan of the check itself. In the mid-2000s to early 2010s, check usage was declining at a rate that would have seen it drop to zero by the year 2021. But, at last count, the Federal Reserve estimated that Americans are still writing between eleven billion and twelve billion checks per year. Some of the credit for that certainly belongs to the electronic settlement process, not only because it makes the money move faster, but because it eliminated a huge cost burden on the back end.

Estimates were that all those airplanes flying paper checks around were costing the industry upwards of $1 billion a year to operate, and that was the price at the turn of the millennium. Adjusted for inflation, and other considerations like spiraling fuel costs, the same system today could easily cost double or triple that. Were we still doing it the old-fashioned way, the industry would have been eager to do away with checks entirely by now, as the UK and Canadian banking system proposed as far back as 2009 in light of their own costly paper-based clearing systems. But there, as here, they opted instead to modernize and switch to an electronic process instead, which has kept the British and Canadian systems alive and well for the foreseeable future. By helping make the check into a faster, less costly payment method than it used to be, hopefully Check 21 has kept it alive for years to come!