How Does a Personal Check Process?

Most checks are processed electronically.
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Check processing has changed considerably since October 2004, when the Check Clearing for the 21st Century Act, more commonly known as Check 21, became effective. The law allows financial institutions to replace paper checks with digital images called substitute checks, making it much easier to process interbank transactions electronically. According to the U.S. Federal Reserve, by 2009, 97 percent of all interbank transactions involved electronic processing.

From a Paper Check to a Data File

If a paper check makes it to the recipient's bank, it rarely goes any further. Most banks hold paper checks for a certain period and then destroy them. Remote deposit capabilities mean some paper checks never reach the bank. Instead, the customer sends a picture of the check to the bank. Regardless, interbank check processing starts by encoding the amount of the check as machine-readable text next to the routing, account and check numbers located on the bottom of the check. The check is then fed into a machine that takes a picture of the front and back and adds the machine-readable data to an electronic file.

Off to a Clearinghouse

Machine-readable data files are then transmitted electronically to a national or regional clearinghouse. The Federal Reserve Bank of Atlanta processes most interbank electronic check data files. The clearinghouse combines the data it receives into one large file, organizes and sorts it, and then sends each bank its own electronic file containing the information it needs to charge the accounts of its customers. The Federal Reserve Bank of Cleveland manually processes the few remaining interbank paper checks it receives by mail.

Back at the Bank

Once a bank receives its own electronic file, it matches the file to each customer and charges the appropriate customer account. Alternatively, the bank may flag and send data for accounts that have insufficient funds or a stop-payment order back to the bank where the check was originally deposited. The customer receives a notice of insufficient funds and the original recipient receives a copy of the bounced check.

Intra-Bank Check Processing

Intrabank check processing works differently than for interbank checks. The approximately 26 percent of checks that are both deposited and drawn on the same bank do not go through the electronic processing system. Instead, so-called "on-us" check processing takes place internally by debiting the payer's account and crediting the depositor's account.