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The Different Ways Checks Are Processed
The basics of understanding how your checking account works are relatively simple. You write out personal checks, withdraw money from an ATM, and use a debit card or check card to make payments directly from your checking account.
But there have been some changes within the last few years that you may have noticed. Personal checks you write may be clearing much faster than before. Other checks you write may be listed as ACH transactions when you look at your bank statement.
Changes in Check Processing
Checks are being handled differently because of changes enacted by the Check Clearing Act for the 21st Century, which is more commonly known as Check 21. The law, passed in 2004, allows financial institutions to process checks electronically rather than send paper checks back and forth between banks in the mail.
Your checks may be processed and cleared at very different speeds because merchants and banks are handling check processing in different ways.
Banks were allowed to process checks electronically even before Check 21 began, but all the banks involved with processing the check had to comply. Now Check 21 makes it legal for financial institutions to create a substitute check - which is essentially an image of the front and back of any personal checks or business checks. When a bank or credit union needs a paper check, it can request a substitute check via fax or email instead of getting the original check by snail mail.
Conventional Method for Processing Checks
The conventional way of processing checks involved you writing personal checks to a merchant such as a local hardware store. Those checks would be shipped to the hardware store's bank, and then to your bank, which would return the payment from your account to the hardware store's bank.
This method took quite a few days to complete, and depended on the travel time a check took going from bank to bank.
Today most financial institutions can change your personal checks into digital images and process the checks electronically.
Electronic Funds Transfer (EFT)
Many merchants and other organizations such as utility companies or mortgage lenders can also change your personal checks into an electronic debit. These are electronic payments taken directly from your bank account using the information printed on your checks.
The procedure for an Electronic Funds Transfer would go like this: You write a check at a business where it is turned into an electronic debit and then sent back and forth electronically between the business's bank and your bank.
Automated Clearing House Payments (ACH)
ACH is one specific type of Electronic Funds Transfer. Businesses use a special network to convert paper personal checks and business checks into electronic payments. You may, for example, mail personal checks to pay your credit card bill. The credit card company converts your paper check into an ACH payment and will most likely destroy your original checks after doing so. The company will, however, keep a digital image of your check on file.
Personal checks can also be turned into ACH payments right in front of you. In this case, a cashier or clerk may scan your check, stamp it with the word void, and then hand it back to you. Generally, businesses that practice this procedure will have a sign at the cash register or will inform you before you write any personal checks.
How The Changes Affect You
The biggest change you'll notice is the speed with which personal checks and business checks are processed. Because checks are cleared much faster with electronic processing, you should always make sure that you have sufficient funds in your checking account when you write a check.
It would be wise to avoid trying to play games with check processing times. This will help you avoid bouncing checks and the overdraft fees that come with such mistakes.
Even though electronic processing means your check will clear more quickly, it doesn't necessarily mean funds you deposit will be available to you sooner. There is a federal law which dictates the length of time a financial institution has before making funds available. That rule has not changed with Check 21.
While you won't be able to choose how your personal checks are processed, you should be able to tell how the checks were handled by examining your monthly bank statement. Your bank is required to list all EFT and ACH transactions on the statement - including the dollar amount. These transactions may be grouped together separately from normal check transactions.
There is no rule requiring financial institutions to send you your cancelled checks after they are processed. However, you can request to receive copies of specific checks.
If there is an error with check processing you should still be able to dispute mistakes and clear up problems even if you don't have the original check or a copy of the check. You should be able to use your bank statement or a receipt from a retail transaction. The law doesn't require that you have the original check or even a copy.
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