1 00:00:00,520 --> 00:00:03,800 Speaker 1: Welcome to Brainstuff from house stuff works dot com Where 2 00:00:03,840 --> 00:00:14,319 Speaker 1: smart happens. H. I am Marshall Brain with today's question, 3 00:00:14,680 --> 00:00:17,480 Speaker 1: When I pay for my groceries by check? Where does 4 00:00:17,520 --> 00:00:22,079 Speaker 1: that check go? Americans write tens of billions of checks 5 00:00:22,120 --> 00:00:24,959 Speaker 1: every year. Even with a lot of check writing moving 6 00:00:25,000 --> 00:00:28,360 Speaker 1: to electronic checks and debit cards, checks are still used 7 00:00:28,360 --> 00:00:31,200 Speaker 1: to pay bills, make donations, and so on because they 8 00:00:31,280 --> 00:00:34,800 Speaker 1: leave a nice paper trail. This means hundreds of millions 9 00:00:34,800 --> 00:00:38,760 Speaker 1: of checks are processed every business day. Keeping track of 10 00:00:38,800 --> 00:00:42,560 Speaker 1: all that paper is a pretty complex procedure. Once you've 11 00:00:42,640 --> 00:00:45,800 Speaker 1: paid by check for your groceries, the first place that 12 00:00:45,920 --> 00:00:49,360 Speaker 1: check goes is to the grocery stores bank, where it's deposited, 13 00:00:49,720 --> 00:00:52,680 Speaker 1: But the funds may not be immediately available unless you 14 00:00:52,760 --> 00:00:55,920 Speaker 1: and your grocery store use the same bank, in which 15 00:00:55,960 --> 00:01:00,440 Speaker 1: case the processing or clearing is handled internally in side 16 00:01:00,480 --> 00:01:04,400 Speaker 1: that bank. But otherwise, the grocery stores bank will probably 17 00:01:04,440 --> 00:01:07,800 Speaker 1: want to verify the check with your bank, the paying bank, 18 00:01:08,120 --> 00:01:12,240 Speaker 1: before it converts the check to cash, but most banks 19 00:01:12,360 --> 00:01:16,360 Speaker 1: don't communicate with each other directly. Instead, they go through 20 00:01:16,360 --> 00:01:20,520 Speaker 1: a middleman and intermediary bank. There are three types of 21 00:01:20,560 --> 00:01:24,479 Speaker 1: these intermediary banks. First, there's the Federal Reserve Bank, then 22 00:01:24,480 --> 00:01:28,440 Speaker 1: there's correspondent banks, and there are clearing houses or clearing 23 00:01:28,440 --> 00:01:32,760 Speaker 1: house corporations. The Federal Reserve Bank is the central bank 24 00:01:32,840 --> 00:01:36,440 Speaker 1: of the United States. Regional banks of the Federal Reserve 25 00:01:36,600 --> 00:01:40,039 Speaker 1: handle check processing for banks that hold accounts with them, 26 00:01:40,480 --> 00:01:44,199 Speaker 1: and they charge a fee for their services. Such services 27 00:01:44,319 --> 00:01:48,760 Speaker 1: include check collection, air, transportation of checks to the Reserve bank, 28 00:01:49,040 --> 00:01:52,080 Speaker 1: and delivery of checks to paying banks. More and more 29 00:01:52,080 --> 00:01:54,520 Speaker 1: of this is becoming electronic, but there's still a lot 30 00:01:54,520 --> 00:01:59,640 Speaker 1: of paper being moved around. Reserve banks handle about of 31 00:01:59,760 --> 00:02:05,440 Speaker 1: US checks. Correspondent banks are banks that have formed partnerships 32 00:02:05,480 --> 00:02:09,399 Speaker 1: with other banks in order to exchange checks and payments directly, 33 00:02:09,840 --> 00:02:12,880 Speaker 1: so they bypass the Federal Reserve and all its fees. 34 00:02:13,480 --> 00:02:17,280 Speaker 1: Outside banks may go through a correspondent bank to exchange 35 00:02:17,400 --> 00:02:20,079 Speaker 1: checks and payments with one of the partners of that 36 00:02:20,120 --> 00:02:24,919 Speaker 1: correspondent bank. Correspondent banks may also form a clearing house 37 00:02:24,960 --> 00:02:29,359 Speaker 1: corporation in which members exchange checks and payments in bulk 38 00:02:29,760 --> 00:02:32,680 Speaker 1: instead of on a check by check basis, and that 39 00:02:32,720 --> 00:02:36,120 Speaker 1: could be pretty efficient when each bank might receive thousands 40 00:02:36,160 --> 00:02:39,240 Speaker 1: of checks in a day. The clearing house banks save 41 00:02:39,360 --> 00:02:42,120 Speaker 1: up the checks drawn on other members and exchange them 42 00:02:42,120 --> 00:02:45,680 Speaker 1: on a daily basis. The net payments for these checks 43 00:02:45,680 --> 00:02:50,280 Speaker 1: are often settled through fedwire and electronic funds transfer system 44 00:02:50,320 --> 00:02:55,359 Speaker 1: that handles large scale check settlement between US banks. Correspondent 45 00:02:55,400 --> 00:02:59,600 Speaker 1: banks and clearing house corporations make up the private sector 46 00:02:59,639 --> 00:03:03,160 Speaker 1: of check clearing, and together they handle about forty three 47 00:03:03,760 --> 00:03:07,520 Speaker 1: of US checks. The rest of the checks are handled 48 00:03:07,560 --> 00:03:11,600 Speaker 1: internally by banks themselves. There are five basic steps in 49 00:03:11,600 --> 00:03:16,160 Speaker 1: the settlement process. First, the grocery store deposits your check 50 00:03:16,280 --> 00:03:20,600 Speaker 1: in its bank. Second, the grocery stores bank passes your 51 00:03:20,680 --> 00:03:24,720 Speaker 1: check along with a payment request onto the intermediary bank 52 00:03:24,800 --> 00:03:30,320 Speaker 1: for verification and settlement. The intermediary bank identifies the paying bank. 53 00:03:31,600 --> 00:03:35,040 Speaker 1: To identify the paying bank, the intermediary bank looks at 54 00:03:35,040 --> 00:03:38,200 Speaker 1: your checks routing number, the nine digit number on the 55 00:03:38,240 --> 00:03:41,080 Speaker 1: bottom left hand corner of your check to the left 56 00:03:41,080 --> 00:03:44,640 Speaker 1: of your account number. The routing number identifies the bank 57 00:03:44,680 --> 00:03:47,640 Speaker 1: that issued the check. Every bank in the United States 58 00:03:47,720 --> 00:03:51,840 Speaker 1: has at least one routing number. Third, having identified your 59 00:03:51,880 --> 00:03:55,840 Speaker 1: bank is the paying bank. The intermediary bank presents your 60 00:03:55,920 --> 00:03:59,320 Speaker 1: bank with the check you wrote along with a payment request. 61 00:03:59,640 --> 00:04:03,800 Speaker 1: If you're bank agrees to pay the check has been verified. Fourth, 62 00:04:04,080 --> 00:04:07,920 Speaker 1: the intermediary bank proceeds to settle the check, debiting your 63 00:04:08,000 --> 00:04:10,720 Speaker 1: bank and crediting the grocery stores bank for the value 64 00:04:10,720 --> 00:04:14,640 Speaker 1: of the check. And finally, your bank debits your checking account. 65 00:04:15,120 --> 00:04:17,960 Speaker 1: At the end of this process, the grocery store has 66 00:04:18,040 --> 00:04:20,880 Speaker 1: full access to the cash value of the check you wrote, 67 00:04:21,279 --> 00:04:23,360 Speaker 1: and then at the end of the month, when your 68 00:04:23,440 --> 00:04:26,840 Speaker 1: bank statement arrives, that check is right back in your 69 00:04:26,920 --> 00:04:30,719 Speaker 1: hand or it's printed on your statements. Do you have 70 00:04:30,760 --> 00:04:34,440 Speaker 1: any ideas or suggestions for this podcast, If so, please 71 00:04:34,480 --> 00:04:37,159 Speaker 1: send me an email at podcast at how stuff works 72 00:04:37,200 --> 00:04:40,320 Speaker 1: dot com. For more on this and thousands of other topics, 73 00:04:40,320 --> 00:04:43,200 Speaker 1: go to how stuff works dot com and be sure 74 00:04:43,240 --> 00:04:45,280 Speaker 1: to check out the brain stuff blog on the how 75 00:04:45,320 --> 00:04:46,880 Speaker 1: stuff works dot com home page.