WEBVTT - When I pay by check, where does that check go?

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<v Speaker 1>Welcome to Brainstuff from house stuff works dot com Where

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<v Speaker 1>smart happens. H. I am Marshall Brain with today's question,

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<v Speaker 1>When I pay for my groceries by check? Where does

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<v Speaker 1>that check go? Americans write tens of billions of checks

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<v Speaker 1>every year. Even with a lot of check writing moving

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<v Speaker 1>to electronic checks and debit cards, checks are still used

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<v Speaker 1>to pay bills, make donations, and so on because they

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<v Speaker 1>leave a nice paper trail. This means hundreds of millions

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<v Speaker 1>of checks are processed every business day. Keeping track of

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<v Speaker 1>all that paper is a pretty complex procedure. Once you've

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<v Speaker 1>paid by check for your groceries, the first place that

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<v Speaker 1>check goes is to the grocery stores bank, where it's deposited,

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<v Speaker 1>But the funds may not be immediately available unless you

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<v Speaker 1>and your grocery store use the same bank, in which

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<v Speaker 1>case the processing or clearing is handled internally in side

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<v Speaker 1>that bank. But otherwise, the grocery stores bank will probably

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<v Speaker 1>want to verify the check with your bank, the paying bank,

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<v Speaker 1>before it converts the check to cash, but most banks

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<v Speaker 1>don't communicate with each other directly. Instead, they go through

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<v Speaker 1>a middleman and intermediary bank. There are three types of

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<v Speaker 1>these intermediary banks. First, there's the Federal Reserve Bank, then

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<v Speaker 1>there's correspondent banks, and there are clearing houses or clearing

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<v Speaker 1>house corporations. The Federal Reserve Bank is the central bank

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<v Speaker 1>of the United States. Regional banks of the Federal Reserve

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<v Speaker 1>handle check processing for banks that hold accounts with them,

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<v Speaker 1>and they charge a fee for their services. Such services

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<v Speaker 1>include check collection, air, transportation of checks to the Reserve bank,

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<v Speaker 1>and delivery of checks to paying banks. More and more

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<v Speaker 1>of this is becoming electronic, but there's still a lot

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<v Speaker 1>of paper being moved around. Reserve banks handle about of

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<v Speaker 1>US checks. Correspondent banks are banks that have formed partnerships

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<v Speaker 1>with other banks in order to exchange checks and payments directly,

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<v Speaker 1>so they bypass the Federal Reserve and all its fees.

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<v Speaker 1>Outside banks may go through a correspondent bank to exchange

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<v Speaker 1>checks and payments with one of the partners of that

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<v Speaker 1>correspondent bank. Correspondent banks may also form a clearing house

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<v Speaker 1>corporation in which members exchange checks and payments in bulk

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<v Speaker 1>instead of on a check by check basis, and that

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<v Speaker 1>could be pretty efficient when each bank might receive thousands

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<v Speaker 1>of checks in a day. The clearing house banks save

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<v Speaker 1>up the checks drawn on other members and exchange them

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<v Speaker 1>on a daily basis. The net payments for these checks

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<v Speaker 1>are often settled through fedwire and electronic funds transfer system

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<v Speaker 1>that handles large scale check settlement between US banks. Correspondent

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<v Speaker 1>banks and clearing house corporations make up the private sector

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<v Speaker 1>of check clearing, and together they handle about forty three

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<v Speaker 1>of US checks. The rest of the checks are handled

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<v Speaker 1>internally by banks themselves. There are five basic steps in

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<v Speaker 1>the settlement process. First, the grocery store deposits your check

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<v Speaker 1>in its bank. Second, the grocery stores bank passes your

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<v Speaker 1>check along with a payment request onto the intermediary bank

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<v Speaker 1>for verification and settlement. The intermediary bank identifies the paying bank.

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<v Speaker 1>To identify the paying bank, the intermediary bank looks at

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<v Speaker 1>your checks routing number, the nine digit number on the

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<v Speaker 1>bottom left hand corner of your check to the left

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<v Speaker 1>of your account number. The routing number identifies the bank

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<v Speaker 1>that issued the check. Every bank in the United States

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<v Speaker 1>has at least one routing number. Third, having identified your

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<v Speaker 1>bank is the paying bank. The intermediary bank presents your

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<v Speaker 1>bank with the check you wrote along with a payment request.

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<v Speaker 1>If you're bank agrees to pay the check has been verified. Fourth,

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<v Speaker 1>the intermediary bank proceeds to settle the check, debiting your

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<v Speaker 1>bank and crediting the grocery stores bank for the value

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<v Speaker 1>of the check. And finally, your bank debits your checking account.

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<v Speaker 1>At the end of this process, the grocery store has

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<v Speaker 1>full access to the cash value of the check you wrote,

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<v Speaker 1>and then at the end of the month, when your

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<v Speaker 1>bank statement arrives, that check is right back in your

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<v Speaker 1>hand or it's printed on your statements. Do you have

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<v Speaker 1>any ideas or suggestions for this podcast, If so, please

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<v Speaker 1>send me an email at podcast at how stuff works

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