Checks must undergo a clearing process so that banks can declare the payment valid. Only after a check clears can funds transfer from the payer's account to that of the institution, company or person receiving the money. A cleared check is one for which the money has successfully transferred from the issuer’s account to the receiver’s account.
Check Life After A Deposit
When you deposit a check into your account, your bank delivers it to the paying bank – often overnight. The issuing bank debits or takes the amount specified on the check from the issuer's account. If the issuer doesn’t have enough in the account to meet the check amount, the transfer might be delayed or canceled. When this happens, the check is said to bounce. If the issuer has sufficient money in his account, the issuing bank sends the money to your bank and the check gets a cleared status.
In the United States, the Uniform Commercial Code addresses this process, and each state implement the Code via statutes. In 2004, the Check Clearing for the 21st Century Act or Check 21 became effective, allowing financial institutions to electronically transmit checks. The act took the check clearing process from a cumbersome, lengthy and costly process to a fast, efficient and inexpensive one.
Check transactions are processed between banks or using institutions such as the Federal Reserve System and clearinghouses. Check 21 has made it easier for banks to collect and transfer checks. Banks can now base check funding transfers or payments on electronic images of the original paper copies. Checks, therefore, are often processed within one business day -- as long as the order comes through within the bank's cutoff time for check processing. It may take more time, however, if the clearing bank needs to address settlement discrepancies.
Decline in Paper Checks
According to data from the Federal Reserve, the use of paper checks has been declining since the 1990s because of the rise of electronic payment methods. Instead of checks, people often use online payment facilities, credit cards, and cash cards as modes of payment. Transferring money has become faster because of increased availability of such means of payment not only in retail, but also in payments for property and even tax-related transactions.