A cash letter is a batch of cheques that a bank sends to another bank, a clearing house or the central bank to be collected, accompanied by a listing of the items and their total. The sending bank is asking the receiver to credit it with the value of the cheques, which is why the bundle was historically called a "letter" asking for cash. Today most cash letters in the United States are electronic files of cheque images rather than physical paper.
The term belongs to the US cheque-clearing vocabulary, where banks exchange cash letters with the Federal Reserve Banks, correspondent banks and private clearing houses. It is also used in international banking for bundles of foreign cheques sent abroad for collection. Cash letters are paired with "return cash letters", which carry back cheques that could not be paid.
Cash letter in plain terms
Imagine a shop that collects vouchers from customers all day. At closing time, rather than taking each voucher separately to the company that issued it, the shop puts them all in one envelope with a slip listing every voucher and the grand total, and sends the envelope off to be paid.
A cash letter is that envelope for cheques. A bank gathers the cheques its customers have deposited that are drawn on other banks, sorts them, adds a summary and sends them on. When the receiving bank or the Fed accepts the batch, the sending bank's account is credited.
How a cash letter works
- Deposit. Customers deposit cheques at branches, ATMs or through remote deposit capture.
- Sorting. The bank of first deposit separates "on-us" cheques, drawn on itself, from those drawn on other banks, and groups the rest by destination.
- Dispatch. Each group is sent as a cash letter, with a header and a control total, to the Federal Reserve, a correspondent bank, a clearing house or directly to the paying bank, before that receiver's deadline.
- Credit. The receiver credits the sender, either immediately or according to an availability schedule, and presents the cheques to the paying banks.
- Returns. Cheques refused for reasons such as insufficient funds or a stop payment are sent back in a return cash letter.
The timing of cash letter deadlines affects when customers can use deposited funds, which in the United States is governed by Regulation CC and reflected in a bank's funds availability schedule.
Image cash letters and Check 21
Paper cash letters had to be flown or driven between processing centres, and the grounding of flights after the attacks of 11 September 2001 showed how fragile that was. The Check 21 Act, passed in 2003 and effective in October 2004, allowed banks to replace the original paper with an electronic image and created the "substitute check", a printed reproduction with the same legal standing as the original for banks that still wanted paper. This made cheque truncation practical nationwide.
An image cash letter is the electronic version: a file containing images of the front and back of each cheque plus data from its magnetic code line, formatted to the industry standard known as X9.100-187, which grew out of the earlier X9.37 format. Within a few years almost all interbank cheque clearing in the United States had moved to images, cutting costs and clearing times.
Cash letters outside the United States
Other countries use different terms but similar processes. In the United Kingdom, cheques have been cleared through an image-based system run under the Cheque and Credit Clearing Company since the late 2010s, later folded into Pay.UK. Internationally, a bank that receives a cheque drawn on a foreign bank may send it abroad in a cash letter through its correspondent, either for "collection", in which case the customer is credited only after payment, or on a "cash letter" basis with provisional credit that can be reversed if the cheque is returned. Foreign cheque collection is slow and expensive, and its use has declined sharply as electronic transfers have replaced cheques.
Risks and controls
Because credit is often given before a cheque is finally paid, cash letters carry float and fraud risk. Altered, counterfeit or duplicate items, including the same cheque deposited both by phone and at a branch, can be caught only when the paying bank reviews the item. Banks therefore apply holds, duplicate detection and image quality checks, and correspondent agreements set warranties and deadlines for returns. Cheque fraud such as cheque washing has kept these controls important even as cheque volumes fall.