Instead of presenting the original paper checks, financial institutions and payment-processing centers transmit data from substitute checks electronically during the settlement process, through the United States Federal Reserve System,[2] or by clearing deposits on the basis of private agreements between member financial institutions.
Financial institutions that process substitute checks according to these private agreements are typically members of a clearinghouse that operates under the Uniform Commercial Code (UCC).
These requirements include the faithful reproduction of the paper check and warranty of the instrument by the "reconverting bank"—the financial institution that created the substitute check or the first financial institution that transferred or presented it during the check-clearing process.
These standards include ANS X9.100-160-2 (Magnetic Ink Printing (MICR)), Part 2, External Processing Code (EPC) Field Use);[9] ANS X9.100-181 (Specifications for TIFF Image Format for Image Exchange); and ANS X9.100-187 (Specifications for Electronic Exchange of Check and Image Data - Domestic) that also cover electronic deposits using mobile phones.
[5][12] The elimination of the paper check from the clearing process saves the banking and treasury management industries handling, sorting, transporting, storing, safeguarding, and mailing costs.
Other laws and regulations that govern substitute checks in the United States include the Expedited Funds Availability Act, Article 3 (Negotiable Instruments),[15] and Article 4 (Bank Deposits and Collections)[16] of the Uniform Commercial Code (UCC), along with a variety of state and federal regulatory laws.