How Are Deposited Checks Processed?

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People don't write as many checks as they used to, but U.S. banks still process billions of them every year. What happens between the time you deposit a check in your account and the time money is transferred from the check writer to you takes place almost entirely electronically.

Overview of Check Clearing

When you deposit a check in an account at a bank or credit union, it's common for the institution to make you wait a day or more before you can access the money. That's so the check has time to clear. During the clearing process, your bank essentially presents the check to the bank of the check-writer and asks to be paid. The other bank confirms that the check is valid and transfers the money to pay the check to your bank, which it makes available in your account.

Fully Electronic Clearing

At one time, check clearing was done by actually moving paper checks around between banks, with the Federal Reserve acting as an intermediary. However, a federal law that took effect in 2004, known as the Check 21 Act, created a fully electronic clearing process. According to the CheckImage Collaborative, a banking industry organization that monitors the implementation of Check 21, virtually all check clearing now takes place electronically.

Clearinghouses and Transfers

Your bank submits the check data file to a check clearinghouse, which facilitates transfers between banks. The Federal Reserve acts as a clearinghouse, but there are private clearinghouses as well. Some larger banks even clear checks directly with each other. Regardless, the data file eventually arrives at the check writer's bank. That bank verifies that the check writer's account has the funds to pay the check, and it transfers money to your bank. If there isn't enough money in the account, the bank can reject the check, "bouncing" it back to your bank. Alternatively, it can pay the check anyway and charge the check writer an overdraft fee.

Substitute Checks

Typically, paper checks are destroyed once they've been deposited. However, there are times when a check writer's bank might still need or want to get a paper check back. For example, it may return canceled checks to account holders. In such cases, it can use the information in the data file to print a "substitute check," which contains all the information that was on the original check. Under Check 21, substitute checks are the legal equivalent of the original check.


About the Author

Cam Merritt is a writer and editor specializing in business, personal finance and home design. He has contributed to USA Today, The Des Moines Register and Better Homes and Gardens"publications. Merritt has a journalism degree from Drake University and is pursuing an MBA from the University of Iowa.

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