WHAT ARE CHECKS,
AND HOW DO THEY WORK?
You reach for your wallet and it’s not there. Panic gives way to despair when you realize that your wallet is gone and so is your cash. Chances are you’ll never see the cash again.
The consequences are not nearly as serious if you lose your checkbook. All you do in that case is close your checking account and open a new one. After that, your lost or stolen checks are worthless to anyone who might try to use them.
Because they are safe and convenient, checks have become a popular method of paying for things or transferring money. But what exactly is a check?
In simple terms, a check is a written set of instructions to your bank. When you write a check, you are instructing your bank to transfer a specific amount of money from your checking account to another person or an organization. You can even write a check to convert some of the money on deposit in your checking account into cash.
When you fill in the blank spaces on one of your checks, you are telling your bank three things: 1) how much of your money you want to transfer, 2) when you want to transfer it, and 3) to whom you want it to go. You authorize the transfer by signing the check.
So, if your favorite aunt sends you a $50 check for your birthday, she’s actually telling her bank to transfer $50 from her account to you. But when you go to cash her check or deposit it in your account, how does your bank know if your aunt actually has enough money in her account to cover the check?
The answer to this question isn’t what it used to be.
Up until 2004, the check had to travel all the way back to your aunt’s bank by truck or by plane. If there was enough money in her account to cover it, her bank would “clear” the check. If there wasn’t enough, her bank would stamp it “NSF”— Not Sufficient Funds — and “bounce” it back to your bank. And on top of all that, your aunt’s bank had to send her cancelled checks back to her every month, along with her account statement.
All that paperwork might have been OK back in 1940, or even 1970, when Americans wrote fewer checks. But as checks became more popular, banks spent more and more time and money moving billions of pieces of paper around the country each year — not the best use of resources, especially when new technology offered a more efficient way to do things.
In 2004, Check 21 went into effect. The new federal law made it possible for banks to handle more checks electronically. Instead of physically moving checks from one bank to another, banks can now electronically transmit images of the checks they process. It’s a lot faster and less costly.
For more information on checks, visit www.federalreserve.gov/paymentsystems.
WHAT IS ELECTRONIC BANKING?
The bank closes in ten minutes. Even if you make it there in time to cash your check, your nerves will be frazzled. Isn’t there an easier way?
Yes, there is. Electronics and computers have turned banking into a round-the-clock business. Automated teller machines (ATMs) now make it possible for you to do much of your banking whenever you choose.
ATMs are computers that are much like limited-service bank branches. You can use them to make a withdrawal, make a deposit, make a loan payment, transfer money from one account to another, or check your account balance. In many cases, automated teller machines of different banks are linked together in networks so you can use them when you travel to a different part of town, another state, or even another country. All you need is a plastic card from your bank and your own password.
Tired of rushing to the bank to cash your paycheck? Ask your employer about direct deposit, a banking service that makes it possible for you to have your money electronically added to your checking account every payday. Instead of receiving a paycheck, you receive a statement that tells you your money has been deposited in your account. Direct deposit is popular among people who receive Social Security checks or pension checks because it saves them the bother of standing in line at the bank, battling bad weather, or worrying about being robbed on the way home from the bank.
Another electronic banking service is called electronic funds transfer, or EFT. By using EFT, a bank can transfer large amounts of money to another bank by sending an electronic message. Electronic transfers take only an instant. An electronic message instructs a computer to deduct a certain amount of money from one bank account and then add the same amount to another bank account. The message is sent, and the appropriate amount is transferred. No cash or paper changes hands, but money is transferred just the same.
Technology has made it possible to bank from the comfort of your own home. Banks offer software packages that allow customers to debit or credit their accounts, check their account balances, or even apply for a loan. Consumers can make these transactions online.
There are also “virtual banks” that have no physical bank office in a traditional way. They provide all of their services to their customers over the internet.
