Check Processing

Check 21 vs ACH: Electronic Payment Regulations

Read Time: 5 min

If your business accepts ACH payments, it helps to know something about check 21 processing and the difference between check 21 vs ACH. When it comes to check processing, it’s important to have as much information as possible. This is so you can make informed choices about the way your business accepts payments. While most business owners have heard of ACH processing, few are familiar with check 21 requirements. Read on for more insight into the rules governing check 21 ACH regulations.

What is Check 21?

check 21 regulations

Before we define Check 21, it helps to show how check 21 processing is similar to ACH processing. Both forms of check processing allow a business to receive payment directly from a customer’s bank account. Therefore eliminating the inconvenience of accepting a physical check and making trips to a brick-and-mortar banking location.

Check 21 references the U.S. law that governs using a substitute check for check 21 processing. The check 21 policy covers those checks created by scanning the originals. Check 21 requirements went into effect in 2004 and have not changed drastically since.

Businesses can process all kinds of checks following check 21 rules and requirements. Checks may take the form of business checks, personal checks, U.S. Treasury checks, money orders, and government checks.

The history of check 21 regulations

The Check Clearing for the Twenty-First Century Act or Check 21 Act became law in 2003. It then became official the following year on the same date. The act gives Congress the ability to give the Federal Reserve System the authorization to support the regulations prescribed to reduce costs for electronic check processing.

Therefore, the new law allows the electronic processing of checks without any significant banking changes in check collection practices. This happens by using substitute checks. As a result, check 21 makes a substitute check equal to an original paper version, as long as it:

  • Accurately shows all the required data on the front and back of the electronically converted paper check
  • Bears the words, “This is a legal copy of your check. You can use it the same way you would use the original check.”
  • Upholds the responsibility of financial institutions to follow the legal check 21 policy for substitute checks

Check 21 rules

Check 21 rules and requirements say the substitute checks created from scanning traditional checks must include the:

  • Precise images in the back and front of the original paper check
  • Routing, check, and transit numbers, which are part of the magnetic ink character recognition line
  • Proof of endorsements from the traditional paper check
  • Name of the bank that created the check
  • Addition of the phrase: “This is a legal copy of your check. You can use it the same way you would the original check.”
  • Correct conformation of the dimensions and standards for the paper check

The MICR line is the encoded number you see at the bottom of a check. It usually shows the bank code, document-type indicator, banking account number, check number, control number, and check amount (usually displayed after the check presents for payment). The acronym MICR stands for magnetic ink character recognition line. The characters on the check are printed with special ink. Only the reader-sorter equipment can read it.

What is ACH?

ACH transfers are payments that go through the ACH network. ACH, also known as the Automated Clearing House, basically represents an electronic transfer from one financial institution to another. Fortunately, ACH processing only requires the checking account information, and not the check itself.

Unlike Check 21 regulations, ACH gets rid of the need to process physical checks by creating substitute checks, thereby providing a strictly electronic method for authorizing check payments.

By using ACH processing, money comes from a customer’s checking account without the use of a substitute check or paper check. The customer only needs to provide a bank account number and routing number to deduct or receive funds from or to their bank account. Businesses may convert checks to ACH, provided they give the customer notification of the conversion.

A customer may give verbal, written, or electronic permission for a vendor to process an ACH transaction or produce recurring payments through ACH processing.

Check 21 vs ACH

check 21 vs ach

When comparing check 21 vs ACH processing, ACH payments offer a more efficient means of sending electronic payments and saving money. Again, by using ACH processing, merchants do not have to exchange physical checks to process payments.

ACH payments are governed by the rules of the National Automated Clearing House Association (NACHA) and the U.S. Federal Reserve. Typically, the payments do not post immediately. This is because they are processed in batches. Nevertheless, some payments may still go through the same day.

Businesses that use check 21 processing are usually high risk companies. These can include credit repair businesses, pharmacies, eCommerce websites, and collection agencies. Check 21 processing allows a business to return a customer’s check to them upon payment by email, or a similar means (such as the web or CD/DVD).

ACH processing typically works out better for low-risk industries, with the vendor’s account funded in approximately three business days. By using this type of account processing, merchants can save on the costs included for account reconciliation, check reissues, bank service charges, or administrative fees. ACH payment processing works out well for low-risk businesses, such as insurance companies or providers of utilities.

Other Electronic Check Options

There are other electronic check options besides check 21 processing. These include electronic check processing (ECP) which converts paper checks into either ACH transactions or check 21 items. This happens through a mobile app or lockbox network.

These types of checks are electronic funds transfers or EFTs. EFT covers several electronic payment types, including check 21 ACH processing, wire transfers, direct deposits, local bank transfers, eWallets, or SEPA payments in the European Union (EU).


As a business owner in the U.S., you can accept checks through check 21 processing or ACH processing. You can benefit from both types of processing if you have a broad customer base. Both types of processing have different rules and it’s important to know about both ACH and check 21 regulations. In most cases, ACH processing is a better choice because it is more efficient and convenient.