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Consumer Information

From Seashells to Bytes

Electronic Payments: The Wave of the Future, Here Today

Check Use Slowing but Still Important

Cash Is Still Popular

Consumers' Corner
Check Use Slowing but Still Important

couple at a computerChecking accounts

Checks are written orders used to tell a bank or other depository institution to pay money to or transfer funds from the check writer to the check recipient. Financial institutions offer several types of checking accounts.

  bullet image The demand deposit account is the most common. Money is available to the account holder “on demand”—by writing a check, making a withdrawal from an automated teller machine, or transferring funds from one account to another.
  bullet image Interest-bearing checking accounts are also offered by most types of financial institutions. These accounts pay interest to account holders based on the amount of funds in the account and an interest rate set by the financial institution backing the account.

Checking account fees vary widely. Many accounts include fees for blank checks, for checks written, and for returned checks and overdrafts. Other common fees are a general service charge and a fee if the minimum balance falls below a certain level.

Check collection and processing

A check written on a particular bank and cashed by or deposited into an account at the same bank is handled within that bank. These “on-us” checks account for nearly one-fourth of all checks. Other checks are called transit checks because they must move between different banks.

Local clearinghouses
Banks in large cities often form associations for exchanging checks drawn against each other. This association is a clearinghouse.

Check conversion—turning a paper check into an electronic payment
You write a check
to a cashier.
A device records your check information–
amount, routing number, etc.
Retailer's system sends
check data to an ACH
operator. (Often cashier
hands your check back.)
ACH operator sends the
data to your bank.
Your bank deducts money from your account and sends it to the retailer's bank.
(One example of electronic check conversion.)

The Federal Reserve's check collection network
The Federal Reserve is the largest nationwide processor of checks, handling about a third of all checks in the United States. The Federal Reserve provides check collection and other payment services for a fee to financial institutions that accept deposits.

The Federal Reserve moves checks around the country via its Check Relay system, a network of airplanes and trucks owned by private vendors and managed by the Federal Reserve Bank of Atlanta. The 12 Reserve Banks also are linked electronically to a central fund that tracks each Federal Reserve Bank's net balance as they exchange checks for settlement.

A check's travels
You deposit a $100 check
from your aunt in Minneapolis
to your Atlanta bank.
Your bank sends check to the
Atlanta Fed. The Fed credits the
local bank's account.
The Atlanta Fed sends check to the Minneapolis Fed, which deducts $100 from your aunt's bank. The bank deducts $100 from your aunt's account and may send her check back to her.
(One example of the processing path of a check.)

Check 21
Until recently, state laws required that an original paper check be presented to the check writer's bank for settlement unless banks had an agreement to exchange checks electronically. To make check processing faster, many banks no longer send paper checks to other banks to receive payment. Instead, these banks exchange checks electronically.

A 2004 federal law, the Check Clearing for the 21st Century Act—also known as Check 21—facilitates the electronic exchange of checks. Check 21 permits banks to replace original checks with “substitute checks,” special paper copies of the front and back of the original check that are the legal equivalent of the original check. Banks can now make an image of a check, send the image electronically to another location, and then print a substitute check from the image to present for payment locally.

Learn more about Check Relay and Federal Reserve Financial Services.

Special checks

When a check is returned

A check may be returned for several reasons. Insufficient funds in the check writer's account and a closed account or stop pay order are examples. If a bank refuses to honor a check, the check must be returned to the bank where the check was first deposited within a time specified by law.

Sometimes a special check that carries a greater guarantee of payment is necessary. The financial institution typically charges a fee for these items.

  bullet image Certified checks are usually used when required by legal contract, such as real estate or automobile sale agreements. Certified checks are considered less risky than personal checks because the bank on which they are drawn has certified that the funds are available in the check writer's account.
  bullet image Cashier's checks have a better guarantee of payment because they are drawn by a bank against its own account.
  bullet image Money orders work like personal checks for people without a checking account or those who prefer not to make payments with cash. You can buy money orders at banks, post offices, and some retail stores.
  bullet image Traveler's checks are sold through banks and travel companies. Lost or stolen traveler's checks will be replaced by the issuing company.