Speaker 1: Welcome to Brainstuff from house stuff works dot com Where
Speaker 1: smart happens. H. I am Marshall Brain with today's question,
Speaker 1: When I pay for my groceries by check? Where does
Speaker 1: that check go? Americans write tens of billions of checks
Speaker 1: every year. Even with a lot of check writing moving
Speaker 1: to electronic checks and debit cards, checks are still used
Speaker 1: to pay bills, make donations, and so on because they
Speaker 1: leave a nice paper trail. This means hundreds of millions
Speaker 1: of checks are processed every business day. Keeping track of
Speaker 1: all that paper is a pretty complex procedure. Once you've
Speaker 1: paid by check for your groceries, the first place that
Speaker 1: check goes is to the grocery stores bank, where it's deposited,
Speaker 1: But the funds may not be immediately available unless you
Speaker 1: and your grocery store use the same bank, in which
Speaker 1: case the processing or clearing is handled internally in side
Speaker 1: that bank. But otherwise, the grocery stores bank will probably
Speaker 1: want to verify the check with your bank, the paying bank,
Speaker 1: before it converts the check to cash, but most banks
Speaker 1: don't communicate with each other directly. Instead, they go through
Speaker 1: a middleman and intermediary bank. There are three types of
Speaker 1: these intermediary banks. First, there's the Federal Reserve Bank, then
Speaker 1: there's correspondent banks, and there are clearing houses or clearing
Speaker 1: house corporations. The Federal Reserve Bank is the central bank
Speaker 1: of the United States. Regional banks of the Federal Reserve
Speaker 1: handle check processing for banks that hold accounts with them,
Speaker 1: and they charge a fee for their services. Such services
Speaker 1: include check collection, air, transportation of checks to the Reserve bank,
Speaker 1: and delivery of checks to paying banks. More and more
Speaker 1: of this is becoming electronic, but there's still a lot
Speaker 1: of paper being moved around. Reserve banks handle about of
Speaker 1: US checks. Correspondent banks are banks that have formed partnerships
Speaker 1: with other banks in order to exchange checks and payments directly,
Speaker 1: so they bypass the Federal Reserve and all its fees.
Speaker 1: Outside banks may go through a correspondent bank to exchange
Speaker 1: checks and payments with one of the partners of that
Speaker 1: correspondent bank. Correspondent banks may also form a clearing house
Speaker 1: corporation in which members exchange checks and payments in bulk
Speaker 1: instead of on a check by check basis, and that
Speaker 1: could be pretty efficient when each bank might receive thousands
Speaker 1: of checks in a day. The clearing house banks save
Speaker 1: up the checks drawn on other members and exchange them
Speaker 1: on a daily basis. The net payments for these checks
Speaker 1: are often settled through fedwire and electronic funds transfer system
Speaker 1: that handles large scale check settlement between US banks. Correspondent
Speaker 1: banks and clearing house corporations make up the private sector
Speaker 1: of check clearing, and together they handle about forty three
Speaker 1: of US checks. The rest of the checks are handled
Speaker 1: internally by banks themselves. There are five basic steps in
Speaker 1: the settlement process. First, the grocery store deposits your check
Speaker 1: in its bank. Second, the grocery stores bank passes your
Speaker 1: check along with a payment request onto the intermediary bank
Speaker 1: for verification and settlement. The intermediary bank identifies the paying bank.
Speaker 1: To identify the paying bank, the intermediary bank looks at
Speaker 1: your checks routing number, the nine digit number on the
Speaker 1: bottom left hand corner of your check to the left
Speaker 1: of your account number. The routing number identifies the bank
Speaker 1: that issued the check. Every bank in the United States
Speaker 1: has at least one routing number. Third, having identified your
Speaker 1: bank is the paying bank. The intermediary bank presents your
Speaker 1: bank with the check you wrote along with a payment request.
Speaker 1: If you're bank agrees to pay the check has been verified. Fourth,
Speaker 1: the intermediary bank proceeds to settle the check, debiting your
Speaker 1: bank and crediting the grocery stores bank for the value
Speaker 1: of the check. And finally, your bank debits your checking account.
Speaker 1: At the end of this process, the grocery store has
Speaker 1: full access to the cash value of the check you wrote,
Speaker 1: and then at the end of the month, when your
Speaker 1: bank statement arrives, that check is right back in your
Speaker 1: hand or it's printed on your statements. Do you have
Speaker 1: any ideas or suggestions for this podcast, If so, please
Speaker 1: send me an email at podcast at how stuff works
Speaker 1: dot com. For more on this and thousands of other topics,
Speaker 1: go to how stuff works dot com and be sure
Speaker 1: to check out the brain stuff blog on the how
Speaker 1: stuff works dot com home page.