Check clearing is the process by which a bank processes a payment by check, with the method varying depending on the financial institution. Overdraft fees generate significant revenue for banks, particularly during the holiday season. Different check clearing methods can impact the likelihood of overdraft fees, and customers can use debit cards as an alternative.
Check clearing represents the time a bank processes a payment by check, whether paper or electronic. Depending on the size of a financial institution, the process by which checks are cleared may vary. Finally, a payment is made from a customer’s bank account to the payee at the time a check clears.
However, before a check can clear with any financial institution, a customer must have a checking account. Funds are withdrawn from that account. If the amount of money requested exceeds the size of the account, a check may be returned for insufficient funds and the customer may be charged overdraft fees. Some banks offer overdraft protection, which allows checks to clear even if funds are not available. Overdraft protection typically comes with limits and fees associated with the service.
Banks rely on the revenue generated from overdraft fees for a significant portion of their profits. These fees represent the bulk of deposit account service charges for large banks annually. A bank is even more dependent on fee income when income from other financial products, such as mortgages, is under pressure. Customers have the most problems clearing checks during the months of November, December, and January. A high percentage of these fees are assessed during this time period because consumers tend to spend more money during the holiday season.
In some regions, a bank is required to indicate the approach it takes to clearing checks. For example, one method is to process checks as they come in, regardless of the value of the check. Another method that is widespread among large banks is to process checks from high to low. In this process, the check with the highest value is processed before any of the smaller checks.
If a bank receives multiple checks on the same day and the total amount of the combined checks exceeds the amount available in the customer’s bank account, this can wreak havoc on the account. A bank that uses high to low check clearing will process the largest check first, followed by the smallest checks in descending order. This increases the likelihood that a checking account will be overdrawn after the first large check is processed, resulting in more overdraft fees for a customer as each smaller check is processed.
Customers can access another form of check clearing with a debit card. A debit card works similar to a check, except that transactions are usually processed at the time of the transaction, which could reduce overdraft fees. In a checking account transaction, funds are withdrawn when the check is received by a bank, which could be days after a purchase is made.
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