Why do banks have checks?

Banks hold checks for a variety of reasons, all of which are based on the need to ensure that the check is honored by the bank where it was issued. This wait, sometimes called the "clearing period", prevents the funds from being used by the customer immediately. When a person deposits a check into their account, the bank must present that check to the bank where it was written. While most of this is done electronically in many places, banks still keep checks to detect fraud or insufficient funds by the check issuer.

Checks in the US and elsewhere

While laws in other countries vary, few countries rely as heavily on paper checks as the United States. In Europe, for example, most payments are made electronically, with the payer transferring funds directly to the payee's account. This is similar to what happens when a customer of a US bank pays using their bank's online bill payment service. In most cases, an electronic funds transfer (ETF) is not subject to the same hold as checks.

In the United States, banks classify checks as local or non-local. Banks retain checks drawn on local banks for a shorter period of time, in most cases just one day. Checks that are considered non-local, meaning they come from a bank that operates outside the check processing region of the local bank, generally take longer. It is important to note that the clearing period may be affected by holidays, weekends or any time the bank is closed. It is also essential to understand that a cleared check may later be presented due to insufficient funds or fraud, and the amount deducted from the depositor's account.

Banking policies for check retention

While there are usually laws that limit the maximum amount of time that banks keep checks, the minimums are usually determined by each bank. Customers should inquire about the bank's specific policies, and the bank should notify them if any of these policies change. It's also important to understand a bank's guidelines on when deposits should be made. While a bank may open in the late afternoon, it may require all deposits to be made by 4pm to be credited that day. Anything deposited after that, whether through a teller or ATM, will be credited the next day.

While many policies are widely enforced, banks may have checks on the accounts of certain customers. Those who frequently have overdrafts, or who deposit multiple bounced checks, may find that their banks have longer-than-usual checks. A new bank account may also be subject to a longer hold as the customer has not had time to build a strong banking history. A check that was previously returned for payment and is being resent to the bank may also be subject to a longer hold to confirm that the money is available. Checks over a certain amount may also be delayed for the same reasons.

Availability of held check funds

When banks hold checks, it means that those checks have not cleared their accounts and the funds are not available for withdrawal. If the depositor is not careful, he can withdraw the account because the money has not yet been officially deposited. It is important that customers understand their bank's specific policies regarding held checks and ask about any unique circumstances in which funds may be more readily accessible.

Checks not performed

Not all checks are subject to a clearing period. Checks issued by the United States Treasury, from IRS refunds to Social Security payments, are usually cleared immediately. Some banks immediately clear a check issued by one of their customers and deposited into another customer's account. Many paychecks from larger companies are actually electronic funds transfers and are released immediately. Some banks also allow a customer to access part of the check while the rest awaits clearing.