What Happens When You Write a Check?

In an age of plastic money, many people have forgotten about or never learned to use the paper checks that come with most bank, brokerage and credit union checking accounts.

Indeed, the volume of checks processed each year has declined, according to a Federal Reserve study of noncash payments. In 2006, the first year of the study, 30.5 billion checks were processed, accounting for 32% of noncash payments. Three years later, in the last year of the study, the number of checks processed had dropped to 24.5 billion, or only 23% of noncash payments.

Still, checks can be handy, especially when someone wants to create a record of a purchase that can't be made via plastic. Examples include payments to friends, relatives, small charities, home repair contractors, corner markets and other microbusinesses.

Speedy Systems

Years ago, checks took at least a few days to flow through the processing system. Today, however, thanks to newer technology, checks can be deposited, transmitted and cleared within a day, according to Sue Douglas, senior vice president of electronic systems and risk management at the State Employees' Credit Union in Raleigh, N.C.

"If you write a check at a big grocery store this morning, it can hit your account tonight. It can truly just fly through the system -- all transmitted electronically," Douglas says.

That increase in speed is supported by the Federal Reserve study. In 2007, approximately 43% of interbank checks involved electronic clearing. By 2009, nearly all such checks, 97% to be exact, were handled electronically at some stage of the process.

The ability to process a check that quickly doesn't mean the bank must make the funds available to the customer that soon. Instead, the bank might release only a portion of the funds and place a hold on the balance. The maximum hold is dictated by Regulation CC, a federal regulation that sets different hold periods for government checks, checks drawn on local or out-of-state banks, cashier's or teller's checks, and checks deposited to brand-new checking accounts or at ATMs, according to a Federal Reserve compliance guide for financial institutions.

How Checks Work

How do checks get processed?

Douglas says merchants that accept checks total each day's receipts and then deposit the checks at a local bank. There, the dollar amount of each check is encoded into the "MICR line" -- the row of numbers and symbols imprinted along the bottom of each check. The amount is filled in by the bank or other processing authority under the account holder's signature and to the right of the routing, transit, account and check numbers. Pronounced "mick-er," MICR is shorthand for magnetic ink character readable, which refers to text that can be read by a machine.

The paper checks are then fed into a reader/sorter, a high-powered machine. The reader/sorter produces images of the front and back of each check and creates an electronic file that contains all the MICR data. Very large merchants, such as national grocery store chains, typically MICR their own checks on site and transmit the data to their bank electronically, Douglas says.

The MICR file is then sent electronically to a clearinghouse, which combines and re-sorts the data, and then forwards the information to each bank on a bank-by-bank basis. The Federal Reserve operates a national clearinghouse. Some banks also use regional clearinghouses. Very large banks have direct lines to one another for check-clearing purposes, Douglas says.

Each bank then matches the data file to its own customer accounts. If all goes well, payment is made. If a checking account has insufficient funds or a stop-payment order has been placed, the data file is flagged and sent back to the bank where the check was deposited. That bank then produces a copy of the original check for the merchant, who can then pursue the customer for payment. The copy is known as an "image replacement document," or IRD, Douglas says. The unpaid check is said to be a "bad check" or to have "bounced." The Federal Reserve study found that more than 127 million checks were returned unpaid in 2009.

Paper Shredder

Meanwhile, the original paper checks are set aside and later destroyed, usually within a matter of weeks or months, depending on the bank's policies, according to Viveca Ware, senior vice president of the Independent Community Bankers of America, a Washington, D.C.-based trade group that represents community banks.

"In most instances, once the paper check is presented at the bank, it stops at the bank," she says.

Some checks don't even make it that far, Ware says. That's because some banks now offer customers the ability to deposit checks remotely. Instead of going to the bank, the customer simply takes a picture of the check with a cellphone and sends that image to the bank to be processed, usually via the bank’s smartphone application.