How the Check Clearing System Works

Check processing remains an important part of commerce in the United States, but there are inherent risks that require an effective check clearing system. The U.S. system protects consumers and businesses, while discouraging criminals from altering or manipulating check payments. Below are important components of the system, along with methods employed to protect the integrity of check processing.

Receipt and Review

When a consumer or business writes a check and it’s deposited, the receiving bank must review the transaction for authenticity. This review process involves examining the check to see if it bears the proper endorsement, and that it appears to be legitimate. The receiving bank will make some portion of the check available to the payee, but the exact amount depends on the bank and the amount the check is written for. Communication with the payor bank is also an important part of the process.

Scanning and Funds Transfer

The receiving bank must send the paper check, or an electronic copy, to the payor bank to finalize the transfer of funds. The standards for check clearing are evolving, because of digital checks and electronic payment. The Check Clearing for the 21st Century Act has compressed the time for clearing checks, and it sets the standards banks must follow, to protect businesses and consumers from fraudulent or errant transactions. Once the payor bank has received proper documentation and notification, it can transmit funds to the receiving bank.

Risk Mitigation

The exact amount of time needed to complete the check clearing process varies, but it’s normally within a few days. The controls built into the system are designed to keep stakeholders honest and to mitigate the risk of loss, if a fraud is perpetrated. However, businesses in particular must remain vigilant to prevent fraud, and to design controls that address risks in check processing.

Risks mitigated by the check clearings system include:

• Forgery of payee endorsement or payor signature
• Duplicate checks
• Altered amounts or payee information
• Insufficient funds and bank fees for payees
• Errant funds transfers or delayed payment

High-Quality Checks

Using bank quality checks is part of a sophisticated, effective means to protect the check clearing system. Consumers and business do not have to pay bank prices for checks, though. Rather, there are third-party service providers, such as ASAP Checks, that provide the high quality checks at competitive prices. Checks that are resistant to tampering and other manipulation are an essential control that all stakeholders in the process should support.

Paper checks continue to play a large role in the U.S. economy and are a reliable form of payment, for businesses and consumers. The American check clearing system mitigates the risk of check fraud, but businesses must remain vigilant. Internal controls, based on the evolving system, are essential for the integrity of check processing. For more information on quality checks, please contact ASAP Checks.