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elbanditoroso's avatar

Question about how a bank knows that a check has cleared - how do they know?

Asked by elbanditoroso (26116points) July 15th, 2013

I generally understand the financial system and how ACH works, but I have always wondered how a bank knows that a check has cleared.

Example:
I use Bank A as my normal bank. Someone sends me a check for $10,000, drawn on Bank B. I take it to my bank and deposit the check in full.

My bank, Bank A, places a hold for all but $200, because they don’t know that the check is going to clear. (This has been common practice for decades). The hold last for some number of days, usually 5, I believe, and then I get full access to my money.

As I interpret this, Bank A never gets positive confirmation that the check cleared and was paid by Bank B. Bank A uses negative confirmation: “the check didn’t bounce in 5 days so it must be OK.” (of course, the question here could be: banks reconcile their transactions overnight, so why do they need 5 days?)

So here are my questions:

a) in this day and age of instantaneous communications, why doesn’t the originating bank (Bank B in my example) send back a message saying “paid” or “bounced”, to Bank A? Why does this need to go through the archaic negative confirmation process?

b) What ever happened to that initiative called Check21 that was purported to turn paper checks into electronic checks, thereby speeding up the process?

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7 Answers

jerv's avatar

1) That would require change, and change costs money. Therefore, the only changes that they will make are those that earn back more than they cost, whether through increased volume or added fees.

2) Debit cards happened.

You are correct that things should take minutes in most cases, and batch-processed by 7 AM the next calendar day at worst, but that assumes that financial institutions have moved into the 21st century.

2davidc8's avatar

My understanding is that Bank B (in your example) never directly tells Bank A that the check was good, or it bounced, etc. Instead, all checks are sent to a central clearing station (so, a 3rd party) which verifies with Bank B and handles the actual transfer of money. In the old days, the checks were physically sent there. So, you do bring up a good question. Nowadays, with checks having all the encoding on them (routing numbers and such), one wonders why can’t the checks be scanned by Bank A and sent electronically to the clearing station. Maybe they do; I don’t know. Or maybe they still have to have the physical check because they need to verify that the signature is legit, though I can’t imagine their having enough time to check every signature.

Judi's avatar

They are using your money interest free for 5 days. On thousands of transactions it adds up. That’s the only reason they still hold it.
They don’t hold ours anymore but we have a history of large transactions with no problems. We’re on their A list. (well, not quite “A”, My MIL is and that’s a whole different world. The banker will come to her house if she’s not feeling well.

CWOTUS's avatar

I believe that the bank does have positive confirmation of the check’s clearing through the normal clearinghouse process, and because of modern transportation and processing, the clearing period can be hours, and in almost no case is more than two days for domestic checks. I don’t recall where I’ve heard that; I’ve known that for decades, as well, as “not-so-common knowledge”.

The typical five-days-for-clearing is taken because it’s written into the banking laws and regulations. The bank will certainly avail themselves of that float to get every dollar of short term interest they can from the aggregated checks from you and other depositors which occurs after “real” clearing but before “mandated end of the clearing period”.

elbanditoroso's avatar

@Judi and @CWOTUS confirm what I thought all along – the confirmation is done and the transaction is affirmed pretty quickly, but we (the consumer) doesn’t benefit from that.

laurenkem's avatar

Also, you can stop payment on a check almost up to two weeks with most banks. So even if my bank tells me your check is “good”, you can still stop payment on it, and my bank will withdraw those funds from my account.

I learned this the hard way.

creative1's avatar

Your best to go into the bank its drawn on and cash it outright with them and then you know its cleared otherwise you wouldn’t know unless you called the bank its drawn on with the account #, check #, Amount and who it written to to ask if its cleared their account yet. So I would take a copy of the check prior to depositing it and call once done. I would also prior to deposting the check call the institution and verify if funds are sufficient. They will ask you pretty much the same information as when you verify that its cleared the account.

@jerv back in the days of Fleet they had a system that allowed a customer service person to see if the check was cleared or not. However that system went away when they merged with BofA.

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