How Does a Personal Check Process?

The check you write can be processed in many different ways.

Although it is declining, the use of the personal check as a method of payment is still widely used. A merchant or a bank has several ways to process the checks you write.

The Conventional Method

The conventional method for processing checks takes the longest. In this method, you write a check drawn off your bank (Bank A) to a merchant, who deposits the check at his bank (Bank B). Bank B sends the check back to Bank A for funds verification. Once the funds are verified as available, Bank A sends the check back to Bank B, which then withdraws the funds from your account.

Check 21

The Check Clearing for the 21st Century Act (Check 21) expedited the way that checks are processed. Now, instead of physically sending the checks from bank to bank, it is now possible to send electronic images of the checks. The term for these images is "substitute checks." This completes the process of funds verification and withdrawal much faster. It's similar to the difference between mailing a letter and sending an email. Getting the letter to its destination takes a few days, but sending an email takes an instant.

Electronic Funds Transfer

With electronic funds transfer, or EFT, the physical check you write to the merchant never makes it to the bank. The most popular method of EFT uses the automated clearinghouse, or ACH, network. The merchant takes the check you wrote it, and runs it through a special scanner. The ACH operator receives this image, withdraws the money from your account, and deposits it in the merchant's account.

EFT's Allow for Instant Payments

Under traditional check-processing methods, you could write a check at the grocery store Tuesday, and deposit your paycheck Wednesday. The time lag between sending the checks from bank to bank made this possible.

Now, EFT payments make it possible for a merchant such as your grocery store to turn your check into an ACH transaction instantly. The merchant deducts the money immediately from your account.

Considerations

The passing of Check 21 and the emergence of EFT's has made check processing more efficient than ever. Certain financial institutions allow customers with advanced smartphones to deposit checks using the phone's camera and an online banking application. This remote-deposit feature allows customers to deposit checks they receive without having to take the check to the bank. You can expect to see this trend emerging with other banks, as customer needs shift and technology advances.

References

• The ACH Network
• What happens when you write a check?
• What you should know about your checks.

Resources

• Check Clearing Under Check 21