Check Clearing for the 21st Century

Suppose that I write a check to Notre Dame for $100 Notre Dame deposits that check at Bank One

Assets Liabilities Notre Dame: +$100 John Stiver: -$100 If I have an account at Bank One, my account and Notre Dame’s account are adjusted accordingly and the transaction ends

Suppose, instead, that my check is from an account at the Bank of New York in Manhattan Bank One has three options Mail the check directly to the Bank of New York for clearance Send the check to a private clearinghouse Use the Federal Reserve check clearing service Americans write roughly 45 Billion checks per year. Around 30% are cleared through the Federal Reserve!!

Items in the process of collection: +$100 Notre Dame: +$100 Assets Liabilities Items in the process of collection: +$100 Notre Dame: +$100 Notre Dame’s account is provisionally credited (the funds aren’t available until the check clears)

The Check is loaded on a truck and shipped to the Chicago Fed South Bend

The Chicago Fed credits Bank One’s Reserve account (provisionally) The Chicago Fed credits Bank One’s Reserve account (provisionally). At this point, the money supply officially increases by $100 (Known as the Float) Assets Liabilities Assets Liabilities Bank One: +$100 Reserves: +$100 Notre Dame: +$100 Items under collection: -$100

The check is then loaded onto a plane (the Fed has its own charter service) and flown to the New York Fed

The check is then sent to the Bank of NY The check is then sent to the Bank of NY. Once the bank receives the check, it can authorize payment. The Chicago Fed is notified of the availability of funds as is Bank One Assets Liabilities Reserves: -$100 John Stiver: -$100 The Float drops by $100 and the transaction is over

Every check is required to have four numbers ACH Transit Route Account Number ABA Routing Number Check Number

The Federal Reserve System has twelve districts numbered 1 – 12 from east to west…

Each District is further subdivided into branches For example, South Bend falls under the Chicago branch You are here!

Eastern Districts Boston (Branch 1) Boston (District 1) Windsor Locks (Branch 2) New York (District 2) Philadelphia (District 3) Cleveland (Branch 1) Cincinnati (Branch 2) Cleveland (District 4) Eastern Districts Pittsburgh (Branch 3) Columbus (Branch 4) Richmond (Branch 1) Richmond (District 5) Baltimore (Branch 2) Charlotte (Branch 3) Atlanta (Branch 1) Birmingham (Branch 2) Jacksonville (Branch 3) Atlanta (District 6) Nashville (Branch 4) New Orleans (Branch 5) Miami (Branch 6)

Western Districts Chicago (Branch 1) Chicago (District 7) Detroit (Branch 2) St. Louis (Branch 1) Little Rock (Branch 2) St. Louis (District 8) Louisville (Branch 3) Memphis (Branch 4) Minneapolis (District 9) Minneapolis (Branch 1) Helena (Branch 2) Western Districts Kansas City (Branch 1) Denver (Branch 2) Kansas City (District 10) Oklahoma City (Branch 3) Omaha (Branch 4) Dallas (Branch 1) El Paso (Branch 2) Dallas (District 11) Houston (Branch 3) San Antonio (Branch 4) San Francisco (District 12)

The ABA (American Banking Association) routing number has four components. XX XX XXXX X Institution Code Federal Reserve Branch/Distance from Branch Federal Reserve District (01 -12 or 21 – 32) Check Sum

The ABA (American Banking Association) routing number has three components. 271291596 This is the Routing Number for NDCU ND Credit Union Federal Reserve Branch and District: 27 = Chicago 1 = Chicago Branch 2 = Distance From Branch Check Sum

The Check Sum guarantees that the routing number is valid 2 X 3 = 6 7 X 7 = 49 1 X 1 = 1 9 X 7 = 63 5 X 3 = 15 9 X 7 63 6 X 1 = 6 6 + 49 + 1 + 6 + 63 + 1 + 15 + 63 + 6 = 210 Every valid routing number must sum to a total that is divisible by 10!!

“If you change the 02 -New York - to a 12 – San Francisco, rather than going to the New York Fed, the check is routed to California. The hanger can paper the city for days before the banks realize what’s happening!” This is only true if: You alter the check sum digit as well as the district code (otherwise, the routing number is invalid) You alter the branch code (it has to be routed to a proper branch) The is a bank in the San Francisco with the existing institution code

Check 21 Check 21 went into effect in October 2004. The key result of check 21 is that an electronic image of a check became a legal document. This electronic conversion can happen at any point in the clearing process

Suppose that I write a check to Notre Dame for $100 Notre Dame scans the check and creates an image file Notre Dame emails the check to Bank One Within seconds, $100 has been deducted from my account and credited to ND’s account!! Bank One emails the check to the Chicago Fed Chicago emails the check to the Bank of NY

Drawbacks to Check 21 Consumers no longer have access to the float (i.e. your account is deducted at the point of sale), but banks do (i.e., banks can still delay the availability of funds) All paper checks must become Check 21 compliant Without a hard copy, the possibility of accounts being credited/debited multiple times exists