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Check Processing & Payments Information

Electronic Check Processing and Other Banking Choices

Posted by Brandes Elitch | Thu, Oct 20, 2016 @ 04:00 PM

electronic check processingToday I read an article by Alessandra Malito called, “Why it still takes so long for checks to clear — and what you can do about it” with the subtitle, “Sometimes a good old-fashioned paper check can feel like it takes an eternity to clear.”

In her opening arguments in the case against paper checks, Malito says, “For all their seeming simplicity, checks can get complicated — there are numerous ways they can be processed, and even if a check clears quickly through electronic processing that doesn’t necessarily mean the funds are immediately available.”

Later in the indictment, Malito dismisses banks as being “usually known for their archaic technology.” Seriously, it would be hard to find a more cliché-ridden, off-base and inaccurate picture of how checks are processed.

Notwithstanding, here is a perspective from the other side of the aisle — checks are a huge part of the payment system! They are not “going away” quickly nor are they going away at all.

Check Processing Facts

The Fed does a study of noncash payments every three years. The most recent data shows that checks represented 15% of all noncash payments and 33% of the overall noncash value. In comparison, credit cards had a 21% share and 3% of overall noncash value while debit cards had a 38% share and 2% value. Think about these statistics for a while.

electronic check processingVirtually all checks are processed electronically. Unlike ACH, where only a portion of check types are converted to ACH payments, images of cashier’s checks, traveler’s checks, high dollar checks, bank checks, drafts and more all clear as checks the next business day. When a bank receives a check (increasingly, from mobile deposits) and it is processed by their cutoff, it clears the next business day.

The idea that it takes “a few days” or “a week” is preposterous, and the ACH does not clear checks any faster. Even before Check 21, there were no three-day points in the Fed’s schedule and it didn’t take more than two business days to clear a check.

Another inaccurate comment by Ms. Malito is that “there are numerous ways for a check to be processed.” In actuality, there is only one way to clear a check per ANSI X9.37 standards, and that is to convert the paper item to an image by scanning or photographing it. The image is sent to the reconverting bank which sends the image to either the Federal Reserve or The Clearinghouse.

Banking Technology and Systems

We should also address another howler here: “banks are known for their archaic technology.”  Unlike small European countries where there are only a handful of banks, there are over 5,000 commercial banks and another 6,000 credit unions in the US.

electronic check processingBanks run complex, interlocking systems including deposit, loan, savings, coin and currency, check processing and a variety of other operations such as card processing and mortgage. These systems need to be up 100% of the time and fail-proof every day of the year with applications working letter perfect. This reliable functionality wouldn’t happen if the technology was archaic.

Did I mention that banking is the most supervised and inspected business from a compliance and regulatory standpoint? No other industry even comes close. Irresponsible comments like the one above cause more harm than good.

Banking is also an extremely efficient system where a million dollar check can be cleared for less than twenty cents. Let’s contrast this with the credit card acquiring industry where a merchant will pay anywhere between 2% and 4% to clear a card payment. This is why car dealers, for example, are loath to accept credit cards for high dollar sales such as down payments or expensive repairs.

Check Clearing Facts

Let’s look a little deeper at Ms. Malito’s comment about why a check takes “days to clear,” specifically, how banks actually prioritize the posting of all the debits and credits that might occur in an account on a typical day.

There is a difference between the “current balance” and the “available balance.” This is what the Expedited Funds Availability Act was meant to address: you deposit a big, out-of-state check and the bank tells you that the funds will not be available for a week. This was pretty outrageous since the bank would find out in one or two days if the check bounced. Banks did this with new customers who had no credit history with them even though the Electronic_Banking-1.jpg“midnight deadline” rule gave the bank where the check was drawn only until midnight of the next banking day to return it. This is not such a big deal anymore, and would not be a concern for the vast majority of deposits; it would be an anomaly, not the norm as Ms. Malito implies.

Every bank has a “transaction posting order” which can make a difference in the available balance. This is important. If the available balance is insufficient to cover a transaction, the item will be considered an NSF (non-sufficient funds), and the bank will either reject or return the transaction or pay according to their overdraft practices. Here is a typical posting order:

  1. Credits in descending dollar amount
  2. Bank-initiated debits in descending order amount
  3. Non-returnable debits in time-stamp order (outgoing wire transfers, debit card, ATM withdrawal, book transfers and bank bill-pay transactions)
  4. Non-returnable debits (not time stamped such as “on-us” checks)
  5. Returnable debits such as an ACH debit (the consumer has 60 days to dispute an ACH debit), then written checks
  6. Post-system generated transactions such as service charges and fees

Let’s recap what we have learned about the reliability of checks and banking:

  • Check writing and check processing is a huge part of the payments system and this is not likely to change anytime soon.
  • Banks have an enormously complex daily task of processing all the debit and credit transactions that occur among their clients, and bank software is highly robust and fail-proof.
  • Banks have a specific order in how they post debits and credits which may generate an NSF in accounts or trigger overdraft policy options and notifications.

CrossCheck is, as the name implies, in the check processing business. When merchants swipe a check through their own imagers or ones we loan them, we effectively do their banking for them.

Multiple Check Insider's GuideUsing our popular Multiple Check service, merchants give the check and a receipt back to the check writer, and we guarantee a stream of checks (up to four) to be deposited on future dates that are mutually convenient. Most importantly, the consumer does not have to apply for credit or pay any interest. It is really easy to use.

Merchants like Multiple Check because they don’t have to go to the bank, run an in-house collections department, or wonder if the payment will be made correctly. They pay us a small fee for a comprehensive service enabling them to complete a sale that would otherwise not happen if we were not standing at the point of sale. Many customers tell us that we approve more high-dollar checks and have fewer declines than any of our competitors. This is the CrossCheck difference! Download our free guide to learn more.

 

Topics: Brandes Elitch

Written by Brandes Elitch

Brandes Elitch is Director of Partner Acquisition for CrossCheck Inc. A certified cash manager and accredited ACH professional, he garnered a Master of Business Administration from New York University and a Juris Doctor from Santa Clara University.