Eli5: why does it still take 2 business days for a check to clear when other transactions are instant?


Eli5: why does it still take 2 business days for a check to clear when other transactions are instant?

In: 146

Nearly everything in the financial system takes a few days to clear after being initiated. Card transactions, electronic bank transfers, paper checks, etc.

Checks are paper drafts, meaning they are regulated differently than Automated Clearing House (ACH) transactions.

When a check is deposited, it has to travel through banking channels from the depositing bank to the paying bank. Sometimes those banks have direct relationships and the funds move quicker. Other times they don’t and the checks have to be routed from one bank to another based on the relationships between them. Checks can go through up to like 20 banks (that’s the most I’ve seen) when traveling from depositing bank to paying bank.

The other answers are hilarious, they seem to suggest it’s a law of physics that cheques take days to clear.

Here in the UK, I can use the banking app on my ‘phone to take a photo of the front and back of the cheque and it’s in my account the same day.

So the real reason is your banks haven’t invested in the technology to make it faster (and cheaper for them, idiots).

Twenty years ago I would have also said that they make money from the delay, but that really isn’t true anymore with interest rates still very low.

Because other transactions take a couple of days, too. What banks do is go ahead and deduct a charge to your debit card from your available balance, but the charge itself is still in a “pending” state until everything is confirmed. Point Of Sale transactions aren’t fully submitted until the end of the business day, and usually aren’t processed until the next business day by the bank, itself. Then the actual confirmation of funds transfer has to take place, which is usually the *next* business day.

Banks try to make this as seamless to the user as possible, trusting certain Point Of Sale providers in order to keep your account as accurate to the moment as possible. Checks, though, work a bit differently in that they aren’t fully electronic; they’re paper and can be faked. The bank has to verify that the check is a real, authorized transaction because writing a check doesn’t carry the same cryptographic security procedures as a Point Of Sale transaction.

“But what about check scanning apps,” you ask? “I scan my check and have the money available immediately!” Well, that’s your bank giving you the benefit of the doubt and advancing you the amount of the check. They assume you know the source of the check and wouldn’t be trying to jerk them around, so they give you the money for it up front (up to a certain amount) while they handle the back end. If it turns out the check isn’t real or is bad, they’ll just yank the funds right back out of your account, anyway.

Depends on the bank.

USAA gives you an instant balance on check deposits through the app and clears direct deposit a day earlier than most.

Fun fact, your paycheck works the same way as a check and also has a clearing process, it’s deposited a day or two prior to your actual payday.

GameStop’s Wallet and Loopring’s protocols get rid of the waiting game. Settle basically immediately. #beyourownbank

ELI5: why do you still have checks? I think the last time I used a check, was around 1990.

I think the technical has been covered, so I’ll address the non-technical. In the U.S., this is mostly a matter of bank policy. Federal regulation requires that financial institutions make deposits available no later than certain time frames. Cash and electronic transfers must be made available by the next day, but many banks (particularly smaller “local” banks) make them available immediately. There are different categories of checks, so depending on what type of check it is depends on how soon the bank must give you access to the funds. There are also exceptions for various reasons that allow banks to hold the check funds for longer periods of time, such as up to 7 days. But the bank is not required to hold the funds at all, and they can give you the funds instantly.

The reason they often don’t is that it represents an unknown risk to the bank. Most of the time the bank won’t know for 1-2 days whether the check you presented to them is valid or not, and even then they still might not know. The world of check payments is fairly complex, being governed by federal regulation, state law, and Federal Reserve procedures, so the sooner the bank makes funds from a check available to a depositor, the riskier it is. Perhaps the risk is lower if the check is drawn on the U.S. Treasury or some large corporation, but even those kind of checks end up being counterfeited, so the bank always has some amount of risk when taking a check for deposit.

Boomer here.

Back in the day, out-of-state checks took two full weeks to clear.

Can you just imagine?