Where Does Your Little Check Go When It Leaves Home?

Okay, we admit it: while they have their strong points, checks are just a little more troublesome than cash. You can never consider a bill paid until the check clears the bank, and that might take a few days -- though it often happens amazingly fast, considering what the check has to go through when it leaves your hands. Otherwise, most of the trouble is at the expense of the bank, and that's why they charge those annoying fees.

A whole industry has emerged to process checks. The first step occurs when your check is deposited by whomever you made it out to. If their account is at the same bank as yours, that's great -- the check is home. Otherwise their bank has to present the check to your bank for payment. In the past this proved excessively complicated, so clearinghouses were invented. A clearinghouse is just what it sounds like: a place where checks go to get cleared. They emerged in England in the 1700s, as check writing became firmly entrenched as an integral part of the financial system. Initially clearinghouses were established by banks or banking networks, but with the advent of modern technology, they became mostly third-party firms.

Here's how it works. The checks the bank receives are sent to the central clearinghouse. In the old days, they were bundled with other checks going to the same banks and had to be taken directly to the banks in question for settlement. The clearinghouses used standard accounting methods to recompense the banks that forwarded the checks. Modern U.S. clearinghouses use a service called the Federal Reserve's National Settlement Service to clear checks on a daily basis, and often employ a mix of voluntary agreements with individual banks, standard accounting, and Federal Reserve Bank reserve accounts to settle the checks. In the US alone, there are about 150 private check clearinghouses. Some can even process checks instantly via the phone lines. If you've ever paid with a check at Wal-Mart or Sam's Club and had it returned to you cleared and canceled minutes later, this is how it was done.

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