If you have a checking account, you are aware of personal checks. But can a substitute check be issued by a financial institution? What is a substitute check, and how can it be used?
What Is a Substitute Check?
A substitute check is a paper copy of an image of the front of the check and the back of the check. Substitute checks are formatted to go through the same check processing procedure as the original check.
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Federal law, through the Check Clearing for the 21st Century Act, has deemed this a legal copy of a check. Financial institutions, like a credit union or bank, can issue a substitute check. Only these financial institutions can legitimately make photocopies of a check.
According to the Federal Reserve, the Check 21 Act became effective in 2004 to "foster innovation in the payments system and to enhance its efficiency." It does this by reducing the legal barriers to check truncation. Check truncation is clearing a check by eliminating the original paper checks.
Receiving a substitute check in your checking account doesn't affect your account statement. Financial institutions will provide paid checks in your account statement. They will be in the form of an electronic image.
Check processing is sped up when using a substitute check. So, ensuring you have enough money in your checking account is always important before you write a check.
What Isn’t Considered a Substitute Check?
Under the Check 21 act, only an insured credit union or bank can issue a substitute check. For instance, if your employer owes payment for labor, they cannot legally give you a copy of the check they pay you with. They can't make photocopies of your paycheck. It must be the original check or a substitute check issued by a financial institution.
An electronic image statement, which are numerous pictures of checks on a page, is not a substitute check. These are on your monthly statement for your bank account.
Check images and photocopies of original checks online are also not substitute checks despite coming from financial institutions.
Who Uses Substitute Checks?
Financial institutions will use a substitute check to speed up check processing. Only a bank or credit union can make photocopies of an original check to make a substitute.
At this point, this is a legal copy of your check. You can use it and cash it the same way you would an original check.
How to Identify a Substitute Check
A substitute check may show up in your account statement. The appearance of a substitute check is similar to a paper check. The front of a substitute check will have the pay to the order of, the dollar amount of the check in both the box and written on the line and a signature line.
The main difference is that it will be slightly larger than the original check. According to the Federal Reserve Board, it must have the statement: "This is a legal copy of your check. You can use it the same way you would use the original check," on the front of the substitute check.
Pros and Cons of Substitute Checks
- PRO: One of the pros is that the Check Clearing for the 21st Century Act allows and requires financial institutions to quickly clear checks. In other words, the clearing process is faster.
- PRO: Another pro is that you're likely protected if you suffer a loss because the check was charged to your account by mistake. You will need the original check to show the amount of your loss. But financial institutions must let you file a claim for an expedited credit, also called a return of your money.
- CON: A con of a substitute check is that if you need proof of payment for someone, the bank or credit union is under no obligation to provide you with the canceled checks. They must, however, offer you a copy of the substitute check.
Frequently Asked Check Questions
Other questions often come up when dealing with a substitute check. Knowing the pros and cons is just part of it. Here are the most asked questions.
Where Do I Endorse a Substitute Check?
As the payee, all endorsements are on the original check. Endorsements are on the back of the original check. This is the same as you would sign a paper check.
Is There a Fee for a Substitute Check?
There are fees with most financial institutions if you overdraft your checking account. It works just as if it were the original check. Each bank or credit union is different in the fee amount they charge.