You may never have heard of an Image Cash Letter before, but this little advancement has completely revolutionized how banks clear checks. Not that long ago, checking account holders were used to getting their physical paper checks returned to them with their monthly statement. We’d store our cancelled checks in an old shoe box and put that box in our sock drawer, or on the top shelf in the back of our closet. We held on to them forever because we believed this document served as the last bastion of proof that a debt was paid, and that destroying them could somehow negate our ability to validate the original transaction. Then, over the course of a few years, banks began substituting images of the checks on the last pages of our statements in lieu of the original items. We were told this was in the name of progress, and just like that our collection of cancelled checks dried up.
So, what happened? As a direct result of 9/11, the “Check Clearing for the 21st Century Act”, colloquially known as Check 21, was passed. This act was designed to digitize a much larger portion of the end to end check clearing process. With the passing of this act, gone were the days where banks and clearing houses had to push paper around the country to process transactions. Instead, collecting banks could take a picture of a check and transmit the image to the paying bank upon which the check is drawn to clear that check. That original check is retained by the collecting bank for a predefined period of time, and then eventually shredded in a secure manner.
To standardize the transmission of these check images, the Fed adopted a universal specification, called the X.937 DSTU Standard. This standard called for the embedding of these check images and transaction data in what is called an Image Cash Letter (or ICL). By transmitting these Image Cash Letters electronically, checks can now clear much faster and in a more secure manner, as they no longer have to be couriered from place to place via truck or airplane.
This was welcome news to lockbox service providers, who previously had to separate, bundle and courier checks around the country. Before Check 21, lockbox service providers needed to maintain multiple regional processing facilities across the country so as not to delay the clearing of checks for its customers. Now, as that entire process is digitized, lockbox providers can transmit checks to clearing endpoints anywhere in an instant, negating the need for these regional sites.
The widespread adoption of clearing checks via ICL ended up opening the door to banking innovations such as envelope-free ATM deposits, remote lockbox, remote deposit and mobile deposit. When you engage in these services, you’re effectively scanning and digitizing the check for inclusion in an Image Cash Letter, making you a very important part of the check clearing process. Simply put, by giving up the courtesy of receiving our cancelled checks back with our statement, we can make a deposit with a picture. And that’s pretty cool.