How Business Check Processors Work

//How Business Check Processors Work

Check usage is changing dramatically. Electronic checks are being used much more often than paper checks. A 2010 study by the Federal Reserve indicates that fully 80 percent of all “noncash transactions” (checks, credit cards and the like) are electronic. Businesses making the transition to electronic checks will have to update their payment infrastructures.

But what happens to a check once it is written? A customer writes a check in payment of goods or services delivered and hands it over to a cashier. Where does it go? Online check services are essentially paper receipts for money to be delivered later. A check is presented to the business’s bank for clearing, which requests the money from the customer’s bank. If the customer has enough money in his account, the check clears and the money is transferred.

Actually, the process is not as simple as it seems. A middleman is used to clear the checks. This middleman is known as an intermediary bank. Such a role is usually played by clearinghouse corporations, correspondent banks or a Federal Reserve Bank. This creates a delay between when a check is deposited and when the business can access its cash value. The check itself identifies which bank it belongs to by means of the routing number at the bottom of the check.

Routing numbers tell banks where checks came from. These numbers play an essential role in the clearing process. A routing number is like an Internet Protocol (IP) address for a computer or a physical address for a house. Without them, checks could not be processed as we know them today.

Even electronic checks use routing numbers. An electronic check can be generated as such, or it can be generated by scanning a paper check and creating a digital image. This image still has the routing number. Digital images of paper checks can be settled without going to the trouble of sending the actual check to the clearing bank in question. Banks do this to save time and money. Transporting checks in bulk can cost a bank in shipping fees and delays.

After the 2001 terrorist attacks grounded all flights, checks could not be delivered to their destinations to clear. The nominal value of all the checks that were grounded was estimated by the Federal Reserve at over $40 billion dollars. This accelerated the transition to electronic checks, which continues today with debit and credit cards.