Created By: Laura Kinchen

 State and federal regulations govern the banking industry  3 key legislative acts mainly affect the check processing system

 Federal Reserve Act of 1913  Uniform Commercial Code of 1958  Expedited Funds Availability Act of 1987

 it directs and controls the banking system,  helps with communication,  enforces regulations,  encourages standardization

Banks provide regular and special printed check forms. These checks display a series of numbers printed in magnetic ink that make it possible for computers to process the checks quickly and accurately.

 A check is a draft drawn on a bank and payable on demand.  Drawer : person who writes the check  Drawee : bank ordered to pay the money  Payee : person the check is made out to

DRAWER PAYEE B NATIONAL BANK A NATIONAL BANK FEDERAL RESERVE (or other intermediary) b 5a 3 4

 Scenario: You write a check for $ for this month’s cell phone bill (Verizon). › You are the drawer or maker of the check. › The cell phone company (Verizon) is the payee › Your bank, A National Bank, is the drawee. Beginning

 The cell phone company deposits your check in its account at B National Bank.  If the drawer (you) and the payee (Verizon) have the same bank, that bank handles it in-house. › ***this happens about 30% of the time and the process ends here  If the banks are different, the processing continues. Step 2

 B National Bank puts a magnetic code on your check showing the dollar amount › Then sends to Federal Reserve or other intermediary › B National Bank has not credited Verizon for the $ because the check has not cleared. Step 3

 Check is then sorted › Bank ID and dollar amount is read from magnetic code  Federal Reserve clears about 1/3 of nation’s checks. Step 4

 Federal Reserve or intermediary credits B National Bank $ in its Federal Reserve account › All financial institutions using the Fed to clear checks has an account with it.  Your check is then sent to your bank, A National Bank  B National Bank has then been credited with the $ › A National Bank has not paid out anything yet.  For this brief period both banks count the same funds, which are called float  Float distorts money supply and reserve figures Step 5

 A National Bank pays the Federal Reserve $ and debits your account $  If your account doesn’t have $ in it, the check is returned unpaid to B National Bank, and ultimately Verizon. › Penalties may be applied by the bank as well as Verizon Step 6

 The canceled check is returned to you › Some banks now send an image of the check or a transaction summary with your bank statement instead of the actual check.  Sending back the actual check is declining because it costs more money Step 7

 B National Bank credits Verizon’s account for $ › Sometime this credit can happen earlier in the process depending on B National Bank’s deposit policies. End

 Process usually take 2 – 5 days  Banks are required to make a depositor’s funds available within 5 days