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

of checks are processed every business day. Keeping track of all that paper is a pretty complex procedure. Once you've paid by check for your groceries, the first place that check goes is to the grocery stores bank, where it's deposited, But the funds may not be immediately available unless you and your grocery store use the same bank, in which case the processing or clearing is handled internally in side

that bank. But otherwise, the grocery stores bank will probably want to verify the check with your bank, the paying bank, before it converts the check to cash, but most banks don't communicate with each other directly. Instead, they go through a middleman and intermediary bank. There are three types of these intermediary banks. First, there's the Federal Reserve Bank, then there's correspondent banks, and there are clearing houses or clearing

house corporations. The Federal Reserve Bank is the central bank of the United States. Regional banks of the Federal Reserve handle check processing for banks that hold accounts with them, and they charge a fee for their services. Such services include check collection, air, transportation of checks to the Reserve bank, and delivery of checks to paying banks. More and more of this is becoming electronic, but there's still a lot of paper being moved around. Reserve banks handle about of

US checks. Correspondent banks are banks that have formed partnerships with other banks in order to exchange checks and payments directly, so they bypass the Federal Reserve and all its fees. Outside banks may go through a correspondent bank to exchange checks and payments with one of the partners of that

correspondent bank. Correspondent banks may also form a clearing house corporation in which members exchange checks and payments in bulk instead of on a check by check basis, and that could be pretty efficient when each bank might receive thousands of checks in a day. The clearing house banks save up the checks drawn on other members and exchange them on a daily basis. The net payments for these checks are often settled through fedwire and electronic funds transfer system

that handles large scale check settlement between US banks. Correspondent banks and clearing house corporations make up the private sector of check clearing, and together they handle about forty three of US checks. The rest of the checks are handled internally by banks themselves. There are five basic steps in the settlement process. First, the grocery store deposits your check in its bank. Second, the grocery stores bank passes your check along with a payment request onto the intermediary bank

for verification and settlement. The intermediary bank identifies the paying bank. To identify the paying bank, the intermediary bank looks at your checks routing number, the nine digit number on the bottom left hand corner of your check to the left of your account number. The routing number identifies the bank that issued the check. Every bank in the United States has at least one routing number. Third, having identified your

bank is the paying bank. The intermediary bank presents your bank with the check you wrote along with a payment request. If you're bank agrees to pay the check has been verified. Fourth, the intermediary bank proceeds to settle the check, debiting your bank and crediting the grocery stores bank for the value of the check. And finally, your bank debits your checking account.

At the end of this process, the grocery store has full access to the cash value of the check you wrote, and then at the end of the month, when your bank statement arrives, that check is right back in your hand or it's printed on your statements. Do you have any ideas or suggestions for this podcast, If so, please send me an email at podcast at how stuff works

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