What it means
When you pay by cheque, the receiving bank has to collect the money from the paying bank. For decades the Federal Reserve ran regional centres that received bundles of paper checks, read the codes printed on them and passed the information to the right banks.
Each site served a group of banks in its area, and together the sites formed a national network. The sites mattered because speed and accuracy affected the availability of funds.
A business that deposited a customer's check wanted to know when the money would be usable, and the processing time at the centre was a large part of that delay. The Federal Reserve also set rules on how quickly banks had to make deposits available to their customers, which put pressure on the whole chain to work quickly.
Two things changed the picture. Consumers and companies moved towards cards, direct debits and online transfers, so the number of paper checks dropped year after year.
A federal law passed in 2003 also allowed banks to send electronic images of checks instead of the paper originals, which meant that the paper no longer had to be physically moved between locations. As volumes fell, the Federal Reserve closed or merged many of its regional centres, since running a large number of sites for a shrinking workload made little sense.
The work now relies much more on imaging and electronic exchange. For finance teams, the change shows up as faster availability of deposits and fewer lost or delayed items, although it also means fewer physical points of contact when something goes wrong.
Even so, checks have not vanished. Many small businesses, landlords, charities and governments still receive them, so an understanding of how clearing works remains useful.
A treasury manager should know the typical timing for check deposits when forecasting cash, and should keep a small buffer for items that are returned unpaid.
In practice
Real-world examples.
Example
A small manufacturer deposits a $12,000 check from a customer in another state. In the past, the check might have travelled through a regional processing centre and taken a couple of days to clear, so the owner delayed paying a supplier until the funds were available. Today the same deposit usually clears faster, but she still checks her balance before committing to payments.
Example
A bank operations manager reviews why the bank has fewer overnight check runs than before. She learns that the clearing process now relies mostly on electronic images, so the physical movement through processing centres has declined sharply.
Example
A charity that collects donations by check asks its bank how fast funds become available. The bank explains the rules on deposit availability and shows that most checks are usable within one or two business days, which allows the charity to plan its payments. The treasurer also reminds volunteers to deposit checks promptly, because delay adds to the waiting time.
Case study
Seen in the real world.
Lakeshore Property Management is an illustrative, fictional company that collects rent in a mix of cards, transfers and paper checks. Its cash forecast assumed that every check would clear within one day, and it often found the bank balance lower than expected.
The finance assistant reviewed the history and found that checks from out-of-area tenants took two to three days to become available. She added a simple timing assumption to the forecast, treating local checks as available in one day and distant ones in three.
The forecast became more accurate and the company stopped making payments that relied on funds that had not arrived. Overdraft fees, which had cost the company about $1,200 a year, disappeared entirely. The illustrative lesson is that the time a check takes to clear is a real working-capital factor, even in a largely electronic world.
Watch out
Common mistakes.
- Assuming that a deposited check is cleared funds the moment it appears on the account.
- Believing that regional processing sites still work in the way they did when paper volumes were high.
- Forgetting that checks can be returned unpaid after the funds first appear available, which reverses the deposit and can leave the account short.
Questions
People also ask.
What did a regional check processing centre do?
It sorted and cleared paper checks between banks, passing each item to the bank it was drawn on.
Why were so many of them closed?
Check volumes fell as people switched to electronic payments, and imaging made it unnecessary to move paper between sites.
Do check clearing times still matter to a business?
Yes, since funds availability and the risk of returned items affect cash forecasting, especially for firms that still receive checks.
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