I just figured that with today’s modern, digital technology there wouldn’t be such a long delay until funds from deposits would become available.
Someone with more specific knowledge may come in later, but I know something about the subject as I studied it briefly in law school. The basic answer is that given the volume of checks in the system, it’s not efficient for deposit banks to keep track of them. Instead, the deposit bank simply sends the check along the system. If there’s a problem, the bank that issued the check will let the deposit bank know – so after a few days, if nobody calls to say there’s a problem, the deposit bank assumes everything is hunky-dory.
–Cliffy
It depends on the bank of deposit, as well the as the bank the check is drawn on. I’ve had checks clear in as little as one day, while others have taken nearly a week. There are a large number of variables at work. In general, checks, drawn on the bank of deposit will clear fastest, followed by in-state checks, out of state checks, and international checks.
The simple answer is that a cheque is a physical thing. It is not electronic.
A piece of paper has to make its way physically around the various banks and clearing houses before it can be considered clear. Keep in mind that same bank cheques do not normally go through the clearing house, so they can be processed faster.
Example.
Day 1 - Deposit into account.
Overnight - Sent to clearing house to be sorted into ‘bank’.
Same night - Cheque is at the drawing bank.
Day 2 - If there are insufficient funds, the cheque is rejected.
Overnight - Cheque is sent back to depositing bank.
Day 3 - Depositing bank recieves cheque, debits your account.
Day 3 - Send you a letter telling you the cheque is a dud.
So, you can see that under the best possible circumstances, a returned cheque will be back at the depositing bank on Day 3.
If there are delays at the clearing house (inordinate number of cheques, cheque gets caught in a machine, torn, ripped, hard to read, damaged), then an additional day gets added to the front.
When the cheque bounces, if there are any delays getting it back to the depositing bank, then add another day to the end.
So, Day 5 could be when you know it’s a dud.
Interstate banks may have longer delivery times from the clearing houses (remember the piece of paper has to make its way physically from location to location), add another day to the front.
Ditto, of the way back, to add another day to the end.
Now you’re up at day 7 before it’s a dud.
International banks, could be weeks.
It’s all about how fast a piece of paper will travel. Some go fast, some go slow, so the bank will allow for the ‘slowest reasonable’ time and will not allow access to the funds for (say) 7 days.
Caught@Work.
Ex-Bank Employee.
In the US, this is governed by the Expedited Funds Availability Act. The general limits are 2 (business) days after deposit for local checks and 5 days for nonlocal checks.
There are several exceptions to the general rule. It’s one day for government, cashiers’ & certified checks, and checks deposited at the same bank upon which they are drawn. There are some special modifications for very small (less than $100) withdrawals, and you may have to wait an extra day for cash withdrawals over $400. Deposits at foreign ATMs have slightly different rules. If it’s a new account and more than $5000 is at issue, or if there’s been signs of fraud in the account before, special rules apply.
This is not meant to be complete. It’s just the highlights of the applicable rules. For specific legal advice, see a lawyer licensed in your jurisdiction.
There’s a catch, Random. The Expedited Funds Availability Act only tells the banks when they must make the deposited funds available to the depositor. It’s entirely possible for your bank to make the funds available to you before the check has actually “cleared,” because the law requires them to make the funds available within a certain period of time.
So, let’s say you deposit a cashier’s check. The bank makes the funds available to you the next day, as they are required to. But, when the paper check finally makes it back to the issuing bank, a few days later, it turns out that the check is a counterfeit (and there are scads of them floating around out there these days). It bounces the check back, and your bank takes the funds back out of your account. If you’ve spent the money in the meantime, this can drive your account into the red, and checks you’ve written start bouncing.
This has become an enormous problem in car sales, so much so that at least one of the big auto auction places now says that, if you want to pay by check, even a cashier’s check, you can’t pick up the car for three weeks. That way, they can be sure that your check is legit. Some interesting examples of the check counterfeiter’s art on this website. Scroll down to the section on check fraud.
I’m aware of that Early. I’ve written an article on one particular type of check fraud, regularly represent banks, and have posted on another type or check scam in GQ on at least one other occasion. But a later claim by a bank against a depositor has nothing to do with the OP’s question about why it takes so long for a check to clear. (or as he put it, how long it takes after deposit for funds to become available.) (Yes, there are slightly different deadlines for sending notice of dishonor by a bank, but in most cases the difference is a day or two, at least for a cashiers’ check. See Reg CC and UCC 3-503(b)(i).
Your point about a used car dealer refusing to allow a purchaser to take a car for an extended period of time is undoubtedly true, but that’s a matter of contract between buyer and seller. The seller could just as easily insist on a waiting period to make sure a cash payment isn’t counterfeit. There’s no direct connection to the time it takes a check to clear (funds to become available to the depositor), though. (There are other UCC remedies that may apply after the check clearing process is complete, some of which can be be brought up to 3 years after the transaction.)
This is not complete, and not as articulate as I would like, but it’s time for me to turn off my computer and head home.
Geez, a little touchy tonight, Random? All I was trying to do was point out that, just because the bank makes the funds available to you, that doesn’t necessarily mean that you’re out of the woods. That check you deposited could still come back and bite you on the butt.
No reason to feel that you have to trot out your credentials. We’re all very impressed.
It’s called “Float” - the time between when the bank gets the funds and the time they let the customer use the funds - IOW, “Free Money” - banks love it.
In reality, a check drawn on a US bank, and deposited in a US bank will clear within 24 hours - if both banks are mega-banks, it will clear within 4 hours. After that, the bank has the money all to itself…
I think this is exactly right. Yes there are logistical difficulties, and yes there are various regulations (most [all?] dating from well before the Internet) but the main point is that the banks have very little incentive to speed up the process. They would rather hold on to the money for a few extra days.
The bank I work for is one of the few that are directly linked to the federal deposit. Our checks are processed that night. They are also not paper drafts. They are ACH drafts.
Didn’t Bush just sign some new law speeding up the clearing of checks by making a check image as legal as a check, or something? What was that about?
Exactly. Read about it here. Until now, the financial system has been shipping bundles of paper checks back and forth across the country. The transportation interruptions following 9/11 revealed how cumbersome that system had become. The new legislation, set to take effect next October, will allow banks simply to transmit digital images of the checks, instead of moving the actual paper.