Exchanging paper checks may seem like an old-fashioned way to transfer funds, and in some ways it is. But as soon as you deposit a check at your bank, chances are the funds will be transferred electronically. That’s why checks can now be deposited and cleared within a day.
The procedure for electronic check processing was defined in 2004, when the Check Clearing for the 21st Century Act — commonly known as “Check 21” — took effect. Instead of continuing to ship checks through the mail before payment is made, Check 21 makes it possible for banks to process a “substitute check” — essentially an image of the front and back of any personal or business check — and then transmit it electronically to the clearing unit.
Nonetheless, speeding up check processing didn’t change the rules regarding how soon banks must make funds available to depositors for withdrawal. Because of faster clearing times, a portion of the funds may be available sooner while the balance may still be delayed several days.
In this guide, we discuss what happens behind the scenes when you deposit a check. Finally, we offer practical advice on how to handle processing errors and fraudulent transactions.
Check Processing Basics
Today, a check you write can be processed in three different ways:
| Method | Clearing Time | Process | Storage Procedure |
|---|---|---|---|
| Traditional/Mail | 2-3 days | Receiving bank ships paper check to clearing unit, who then forwards to check writer's bank | Paper check retained by receiving bank then destroyed after several weeks or months |
| Check 21 / Electronic (includes mobile remote deposit capture, or mRDC) | 1 day | Receiving bank creates "substitute check" and transmits data to clearing unit; business/consumer captures check image with scanner or smartphone and transmits data to bank | Paper check destroyed by receiving bank when substitute check is created or voided by business/consumer after transmission |
| Electronic Funds Transfer (EFT) Conversion | 1 day | Biller creates "substitute check" and transmits data to biller's bank | Paper check destroyed by biller when substitute check is created or voided and returned to consumer |
- Traditional Method: This manual process still exists but is now a rare practice. It’s performed entirely via postal mail, which explains why clearing can take several days through this method.
When you write a check, the payee deposits the check to his or her bank, which then sends it to a clearing unit such as a Federal Reserve Bank. The clearing unit then debits your bank’s account and credits the payee’s. From there, the check returns to your bank and is stored until it’s destroyed.
- Electronic/Check 21 Method: Nearly all checks processed today are received as e-checks, or electronic check images, and are cleared within one business day. Hard-copy versions are also retained for some time before being destroyed. Electronic processing was available even before Check 21 existed, but there was little standardization of electronic processing methods. Check 21 set universal rules for all banks. Some banks still insist on receiving a paper check, in which case the other bank can send a substitute check instead of the original.
Under Check 21 substitute-check images are transmitted for clearing to one of the following channels:
- Directly to the check-writer’s bank
- To a local clearinghouse exchange
- To a correspondent institution (usually a very large bank or credit union)
- To a Federal Reserve Bank (there are 12 throughout the U.S.)
Check 21 also allows accountholders to transmit check data directly to their banks so that they don’t need to deposit the physical paper check. Deposits made through mobile remote deposit capture (mRDC), which requires using a smartphone app (or scanner) and snapping an image of the check, are growing more common.
- Electronic Funds Transfer (EFT) Method: To streamline their operations, many billers will convert your paper check to an electronic withdrawal from your checking account. The most common type of EFT is the ACH (Automated Clearing House) transfer. For instance, you can mail a paper check to your utility company, which will take the routing number and account number from the check and use that information to request an ACH payment. The company then destroys the hard copy check and retains the digital image.
This can also happen at the point of sale. A store clerk can scan your check to retrieve an image and capture your checking account information. The clerk will then void the physical check, return it to you and send your payment information to the merchant’s bank electronically. These transactions will appear on your bank statement as “debits,” not checks.
How To Handle Check Processing Errors & Unauthorized Transactions
Check-processing errors and fraudulent activity are not uncommon, though you generally won’t be liable for either if it affects your account. However, make it a regular practice to review your bank statements and ensure they’re free of inaccuracies, which you have a right to challenge.
Depending on how your check was processed, you must follow a specific procedure:
- Traditionally Processed Paper Checks: Each state dictates its own rules regarding when and how you can file a claim on errors concerning conventionally processed checks or on checks you didn’t issue yourself. Check with your bank for state’s specific requirements.
- Electronically Processed Substitute Checks: If your bank provides you a substitute check in connection with a possible error or an unauthorized transaction appearing on your bank statement, you may be entitled to an “expedited recredit,” a special type of refund allowed by Check 21.
To qualify for the refund, contact your bank within 40 days of either: 1) the date your bank furnished the substitute check or 2) the date corresponding with the potential error on your statement. Submit a claim in writing to your bank, and include relevant documentation.
If your bank’s investigation concludes that an error was indeed made or fraud committed, it must credit your account for the transaction amount by the end of the next business day. If 10 business days pass without resolution, your bank must continue to investigate and credit your account for a portion of the disputed amount.
- EFT-Processed Payments: Contact your bank within 60 days of receiving your bank statement showing a possible error. Your bank must initiate an investigation within 10 days of being notified.
If 10 days pass with no determination as to the validity of the transaction, your bank must continue to investigate for up to an additional 45 days and credit your account for part of the amount in question.
This rule applies to:
- Paper checks converted to ACH transfers
- ATM withdrawals
- Debit card purchases
- Electronic transactions made with your debit card number or checking account information
Sometimes, errors and fraud can haunt innocent consumers. This might mean being reported to a debit bureau such as ChexSystems, which tracks your deposit account history the way a credit bureau reports on your credit history. If any errors or fraud appear on your ChexSystems consumer report, you must follow a different dispute process.
