Why it takes so long for checks to clear

Jay Haas after the third round of the Greater Hickory Classic at Rock Barn on the Jones Course in Conover, N.C.


Tess Vigeland: Is there any bigger bogeyman than the banks? The nation's money holders earned more than their share of scorn and rotten tomatoes over the last couple of years. Mostly for all the new-fangled financial products they designed that promptly landed the country into a pickle. But some of things that drive us bank customers bonkers are old-fashioned transactions, like when you deposit a check -- and it takes two decades to clear. OK, a few days, but you get my point. Especially when they have no problem clearing the checks that you write.

Our New York bureau chief Heidi Moore feels your pain and set out to get answers.

Heidi Moore: No one uses checks any more, right? Everything is so electronic now. Carrying a check around feels like paying in beads and wampum or using an abacus.

Bank teller: And this will be going in your checking account?

But when you work for yourself, as I did until recently, you don't have direct deposit. You wait weeks and often months, carrying checks lovingly to the bank and you feel relief that you can pay your bills. Then, the whammy: All that money isn't going to be available for days.

Martha Steger: Four days? What are they doing, reading the biographies of all the bank board of directors or what?

That's freelance writer Martha Steger. She rents out her parents' old farm, but the tenant's checks take time to clear. So to avoid a crunch, she pays the farm's bills out of her own money first.

A lot of small-business owners share her resentment. Randi Minetor does public relations. With the bad economy, companies often take longer to pay her, which makes check holds all the more infuriating. She changed banks several times to get her checks cleared faster, but it's always the same story.

Randi Minetor: Sometimes that money just doesn't come in quite when you want it to, and they have the banks hold it up another three days. It is a tremendous inconvenience for a sole proprietor.

Banks protest that the vast majority of checks do clear in less than two days. Checks over $5,000 can get held for up to seven days.

One common conspiracy theory is that banks hold your money so they can earn interest on it. When the Fed paid banks 5 percent, sure. But for one-quarter of one percent, banks don't bother, says Bob Meara, an analyst with research firm Celent.

Bob Meara: In today's environment, that's not interesting at all to banks.

So why are banks holding up your check?

Nessa Feddis: The reason customers don't get money from checks immediately is that the checks may be returned as unpayable, and if the customer's already spent the money, the bank may suffer the loss.

That's Nessa Feddis, a top lawyer for the American Bankers' Association. She says banks lost $1 billion on bad checks in 2008. And verifying a paper check is still pretty time-consuming. Here's how it works: When you deposit a paper check, your bank sends it to a processing center. The Fed used to have 46 of those. But with people writing fewer checks, the Fed has just one now. It's in Cleveland. That slows things down. Then the check has to make a round trip between your bank and the bank that pays it. All told, the circuit can take around six days.

Technology doesn't fix everything.

Feddis: More and more there is an electronic aspect to check processing, but unlike credit cards, it is not, nor will it ever be, entirely electronic.

All is not lost, however. If your bank likes you, the manager can give you your money faster.

Feddis: Many banks will provide quicker availability for good customers. So people should ask for sooner availability if they need it.

Just don't accept one common excuse: It doesn't take longer if your check is from another state.

I'm Heidi Moore for Marketplace Money.

About the author

Heidi N. Moore is The Guardian's U.S. finance and economics editor. She was formerly the New York bureau chief and Wall Street correspondent for Marketplace.
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I know the banks say it doesn't make them money but...

I write checks for a business and pay myself out of the same account. So I know when it comes out of the business's account and when it's credited to mine.

Bob Meara is being disingenuous. It may not be a lot of money, but as anyone else seen the banks turn down a chance to pick the consumer's pocket?

Handling checks for small businesses can be cumbersome, no doubt. However your report failed to mention that there are small business solutions that enable check processing where funds clear in one or two days; in some cases the same day. Intuit's Quickbooks has such a low cost service, no doubt there are other similar solutions in the marketplace. Your story missed this opportunity to share the potentail to overcome the pain of check processing for small businesses!

I left banking in 1990 and I looked for answers to two questions on the internet but without great luck. Your piece seems to imply that the Fed clears all checks. You may not have meant to imply that, but aren't there still private clearing houses? Back in the 1980s banks in a given city cleared checks with one another several times a day and there were no or few intermediaries. The presenting bank was informed within 48 hours when a check presented for payment was refused. That's why "local" checks cleared faster. Now if a check written on a rural Arizona bank were deposted in rural Minnesota bank the receiving bank might have cleared it through a Minneapolis correspondent who cleared it through the Phoenix clearing bank who sent the paper (or image) to its rural AZ correspondent bank. If that bank found insufficient funds in the account upon which it was drawn, it had 48 hours to present it to the Phoenix bank, who had 48 hours to present it to the Minneapolis bank, who ...well, you see. Every bank that stamped the back of that check in the payment clearing process had to handle it on the slow return journey to reverse entries on its books. Clearing for payment was speedy, but returns were slow and required special handling and cost. That's why a crosstown check did clear faster. While electronics certainly could eliminate the problem by transmitting all the necessary data swiftly and securely, are there vested interests who keep some of the old rules in place, perhaps to shift folks to ACH and electronic payments? While my understanding of the system is outdated, I do think "local" checks -- "in state" might be inappropriate -- do clear faster simply by virtue of having fewer intermediaries.

I worked in banking service for 10 years until 2 years ago, when they laid many of us off prior to a buyout. One thing that we agents had to be familiar with was the impending Check 21 legislation that is intended-- eventually-- to make check clearing much faster by using electronic scanning and transmission of check information between banks and the Fed.

Unfortunately, banks were not immediately required to participate in this system, on the grounds that it required an investment in new technology that not all banks were prepared to pay for. As far as I understand, at this point some banks participate and some don't, which makes the whole process less clear to consumers who need to access their deposits ASAP. There IS a final deadline for compliance by all banks, but I don't remember the date at present; I'm sure searching on the Internet for "Check 21," especially on the Fed's website, would turn up that information.

Two words that make the reason behind delays by banks much clearer? "Fee income." It's become the replacement for interest income since loan rates have been at historic lows....

The closest thing to "immediate" transmission of account information to a bank occurs when a merchant uses a scanning device to transmit your check information through the same basic system the Fed uses for ACH (Automated Clearing House) electronic payments. I don't know that the bank immediately knows about those debits as they would with a debit card, though.

And the writer who said their bank would hold a deposited check drawn on their own bank-- should probably be shopping for a new bank.

Although I consider Marketplace an exemplary source I remain skepical about banks' reasoning for holding checks before clearing. If this stated reasons were as true as the bank representative wanted us to believe why is there little or no reciprocity?

My employer stopped using direct deposit over a year ago so I wait longer to receive my paycheck. Then When I deposit it it takes 2 to 5 days to clear (even though the paycheck is written from the same bank.) My solution? I use 2 different banks. At bank number one I have free checking account from which I pay my bills and use the ATM/debit. I keep a minmimum balance there. At bank number two I keep two savings accounts. When I get my paycheck I cash it at bank number two (minus my deposit to savings) and deposit cash to bank number one that way my money is immediately available.

As I have always understood the check clearing process, checks clear overnight. Banks present the checks to the clearing house at night and get credited immediately. The reason banks historically took so long to credit the individual's account was that while the clearing house made the funds available immediately, it took time for the actual paper check to get back to the bank on which it was drawn and be processed. It was at that point -- days later -- that it may be discovered that the there were insufficient funds in the account or that the check was fraudulent or had a stop on it. At that point the bank on which it was drawn would send it back to the bank in which it was deposited . . . you get the idea. To guard against the risk of having the transaction reversed a week or two later, banks did not make funds available immediately.

I am not sure how checks are cleared today. The presentation and immediate crediting part of the operation is, I believe, intact. What I do not know is whether this process now includes transmission of the account numbers of the checks presented back to the bank on which they are drawn in the same way that ATMs operate. If so, then it would seem to me that it should be "known" (in quotes because, after all, this is all done electronically) if there are sufficient funds or if a stop has been put on the check. Thus it would seem to me that the only risk to the banks are stolen or counterfeit checks against which, I believe, they carry insurance.

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