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

When you write a check to purchase goods and services, it passes through the hands of several banks before the process is complete. Marshall explains how checks are processed through intermediary banks in this episode.

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Episode Transcript

Speaker 1 (00:00):
Welcome to Brainstuff from house stuff works dot com Where
smart happens. H. I am Marshall Brain with today's question,
When I pay for my groceries by check? Where does
that check go? Americans write tens of billions of checks

(00:22):
every year. Even with a lot of check writing moving
to electronic checks and debit cards, checks are still used
to pay bills, make donations, and so on because they
leave a nice paper trail. This means hundreds of millions
of checks are processed every business day. Keeping track of
all that paper is a pretty complex procedure. Once you've

(00:42):
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

(01:04):
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

(01:24):
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,

(01:49):
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,

(02:09):
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

(02:32):
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

(02:55):
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

(03:16):
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

(03:38):
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.

(03:59):
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,

(04:21):
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
dot com. For more on this and thousands of other topics,
go to how stuff works dot com and be sure

(04:43):
to check out the brain stuff blog on the how
stuff works dot com home page.