Check clearing is the sequence of steps that turns a deposited check into money in the depositor's account. The bank where the check is deposited sends it, or today an image of it, to the bank on which it is drawn. That bank decides whether to pay it, the two banks settle the amount between them, and if the check is refused it is sent back and the deposit is reversed. Outside North America the instrument is spelled cheque and the process is called cheque clearing.
A check is a debit instruction that the payee, not the payer, puts into the banking system. The payee's bank cannot know at the time of deposit whether the payer has funds, which is why clearing takes time and why deposits are provisional until the paying bank has had the chance to refuse. Check volumes have fallen steadily for decades as electronic payments have grown, but checks remain widely used in the United States, especially between businesses.
Parties
The person who writes the check is the drawer, and the person named on it is the payee. The payee deposits it at the depositary bank, also called the bank of first deposit or collecting bank. The bank on which it is drawn is the drawee bank or paying bank. Between them there may be one or more intermediaries: a clearing house, a correspondent bank or the central bank.
Steps in clearing
At deposit, the bank captures the data printed along the bottom of the check in the MICR line, which gives the paying bank's routing number, the account number and the check number, and records the amount. It credits the depositor provisionally. Checks drawn on the same bank, known as on-us items, are settled internally.
Other checks are grouped by destination into a cash letter and presented to the paying banks, directly or through an intermediary. Settlement between banks takes place on a net basis across accounts at the central bank or a correspondent. On presentment, the paying bank verifies the item, checks that the account is open and funded and that there is no stop order, and either posts the debit or returns the item with a reason. A bounced check returned for non-sufficient funds travels back to the depositary bank, which reverses the credit and usually charges its customer a fee.
From paper to images
For most of the twentieth century, clearing meant physically transporting paper between banks, by road and air, which made it slow and vulnerable to disruption. In the United States, the Check 21 Act, which took effect in October 2004, removed the legal need to present the original. It created the substitute check, a paper reproduction of an image that has the same legal standing as the original, so that banks could exchange images electronically and print a substitute only where a recipient insisted on paper. Within a few years almost all interbank check clearing in the country was by image, and the Federal Reserve consolidated its many regional processing sites into one.
Stopping the paper at the point of deposit and sending only data and images onward is called check truncation. It also made possible remote deposit capture, in which a business scans checks at its premises or a consumer photographs one with a phone. Other countries made similar changes: India adopted a cheque truncation system, and the United Kingdom introduced an image clearing system from 2017 under which a cheque generally clears by the end of the next working day.
Funds availability
Because a check may still be returned after deposit, banks limit how quickly the depositor can withdraw the money. In the United States, a federal regulation sets maximum hold periods, and each bank publishes a funds availability schedule within those limits. Availability is not the same as final payment. A check can be returned after the funds were made available, and the depositor remains liable for the amount. Many scams depend on this gap: the victim deposits a counterfeit check, sees the balance rise, sends part of the money onward as instructed, and then learns the check has been returned.
Fraud and controls
Checks carry the account and routing numbers of the drawer in plain view and are authenticated mainly by a signature, which makes them a persistent target. Common schemes include counterfeiting, forged signatures or endorsements, alteration of the payee or amount by check washing, and kiting, which exploits clearing delays between accounts. Theft of checks from the mail rose sharply in the United States in the early 2020s.
Banks offer business customers positive pay, in which the company sends its bank a list of checks issued and the bank pays only items that match. Liability for a fraudulent item is allocated between the depositary and paying banks by law and by the warranties each bank gives when it passes a check along.