What is a Substitute Check?
A Substitute Check is a digital reproduction of an original paper check. In the U.S. the Substitute Check is a negotiable payment instrument and is considered to be legal check in lieu of the paper check.
Financial institutions and payment processing centers use the Substitute Checks for a transaction between themselves to speed up the check circulation process. These are generally slightly larger than the original paper checks with images of the front and back side of the check. It includes text that indicated the check is a legal copy.
Substitute checks are authorized under the Check Clearing for the 21st Century Act or Check 21 Act. It allows the recipient bank of a paper check to make an electronic version of the original paper check and the digital copy of the check is known as Substitute Check.
The payments of converted checks are governed by Automated Clearing House Payments rules and not by the Check 21 Act.
What are the Requirements for Substitute Checks?
There are certain legal requirements which are to be followed while creating a Substitute Checks. If a Substitute Check doesn’t adhere to these requirements, the check will not be considered as a legitimate equivalent of the original check. Those requirements are:
(i) A Substitute Check must include all the details that are depicted on both sides of the original paper check and that information must be accurately represented in the copy. This information includes full names of the payor and payee, courtesy and legal amounts, encoding information, endorsements, and others.
(ii) The MICR line of the original check must be accurately represented in the Substitute Check.
(iii) “This is a LEGAL COPY of your check. You can use it the same way you would use the original check”- this must be clearly written on a Substitute Check
(iv) A warranty must be provided for a Substitute Check by the financial institution at the time of truncation.
(v) ASC X9.100-140 standards must be followed while capturing the check images and MCR data.
Substitute Checks are also bound by the Expedited Funds Availability Act, Article 3 (Negotiable Instruments), and Article 4 (Bank Deposits and Collections) of the Uniform Commercial Code (UCC).
Several other state and federal laws are also implemented on the transaction with Substitute Checks.
