Chapter 6 Checks

• Jurisdiction: United States

Chapter 6 Checks

Purely electronic payment methods, such as Zelle, Venmo, debit cards, credit cards and ACH, have risen in popularity and dollar volume, but old-fashioned paper checks remain a common method of payment for many. According to the most recent triennial Federal Reserve Payments Study, there were approximately $17.8 billion check payments with a value of $28.8 trillion transacted in 2015.⁶⁵ Most companies still use checks, in one way or another.

A. Check Processing, Generally

A "paying bank" issues its customer (called "maker" or "drawer" of the check) blank paper checks that allow the customer to complete the information on each check and to make a payment to a third party (called the "payee" or "drawee") from the checking account via that check.⁶⁶

Once a payee receives possession of a completed and signed check, the payee presents the check to the payee's bank (the "collecting bank"). If the check is presented to the collecting bank in paper form, the collecting bank will convert the check into an electric record. Alternatively, the payee may present the check electronically using special equipment issued by the collecting bank. The check then goes through the settlement process, which has the effect of transferring funds from the maker's account at the paying bank to the payee's account at the collecting bank.

The settlement process is straightforward when the paying bank and the collecting bank are the same institution; the bank debits the maker's account and credits the payee's account. When the paying and collecting banks are the same, the check is sometimes referred to as an "on-us" check.

When the paying bank and collecting banks are different institutions, the check is an "interbank" check. Settlement can occur in one of several ways: (1) the collecting bank can present the check directly to the paying bank; (2) the collecting bank can use an intermediary called a correspondent to collect the funds; (3) the collecting bank may be a member of a private clearinghouse arrangement among other banks; (4) the collecting bank can forward the check or image to the Federal Reserve Bank for collection; or (5) the payee can collect the funds from the drawer's account using an electronic-funds transfer method such as an ACH transfer.

There is a gap of time between the presentation of a check to the collecting bank and the collection of the funds from the paying bank. This gap of time is sometimes referred to as "availability float" or "clearance time." During availability float, the collecting bank may make funds available to the payee. The amount of funds that will be made available to the collecting bank's customer is determined by regulations and by the collecting bank's funds-availability policy.⁶⁷ Intra-bank check transactions may have a minimal transaction clearance time. Inter-bank transactions may take multiple days to clear, depending on the location of each bank and the method of presentment.

Dishonor occurs when the paying bank does not pay the collecting bank. The most common reason for dishonor is a lack of sufficient funds in the maker's account. Recall that the collecting bank may have extended provisional credit to the payee; if the payee has already withdrawn or spent the provisional funds, the...