how did banks clear checks and get funds from other banks before computerization?
In: 6540
Many years ago when I worked at Radioshack before everything was computerized, we had to manually verify funds for customers who paid by check. Literally as a store employee, we would take the check, call the bank phone number (listed on the check), state we were a cashier with Radioshack and wanted to confirm “funds are available” for literally every customer who paid by check.
It was extremely awkward to make this phone call in front of the customer while there was a line of people waiting to check out and made no sense to me – even if there were funds available that afternoon, doesn’t guarantee the funds would be available two days later when someone cashes the check.
I don’t know if it is true or not, but there used to be a story on the internet that someone got away with bank fraud by treating their checks with a chemical that would disengage them between 24 and 36 hours.
This allowed them to pay a merchant, the merchant would deposit the check, it would make through the first part of the check processing where the merchant’s bank would see and record the check, but then it would turn to dust in a bag while in transit to the bank of the person who wrote the check. For some reason this allowed them to keep it up for a long time until one day they missed a corner of a check that did not turn to dust, and were found out.
Ah, kids these days don’t know about floating checks to pay your rent. Or writing a check for a penny, to yourself, to get cash back from the grocery store, to float yourself, and then hoping your paycheck clears before the check clears. Memories.
If I recall correctly, one avenue for young, newly-minted commercial pilots to build hours/make money was to fly interstate checks for banks overnight. They would literally pickup bags and bags of paper checks from banks during off-hours and literally fly them overnight to their destination so they could be processed-through in the system. Not sure if there is still such a market for this, but I know people still right checks and they have to be physically transferred between states (I think).
Originally, that’s what a check was. Banks DIDN’T clear them ahead of time. Owning a checkbook and an account from another bank meant that the retailer, or the other bank, trusted YOUR bank enough to trust YOU to write them a check. They didn’t verify on the spot, but a day, or days, later instead, and that was done manually.
That’s why bouncing a check was such a stain on your record. When I was a kid, if you did that very much, your bank would revoke your checkbook, close your account, and tell you to pound sand.
One of the fun scams criminals would do as they switched over to computers was to muck with fake checks. They’d make checks with a printed number for a big bank that used computers and use magnetic ink for a small bank that was behind the times. So the fed’s computer would read the magnetic ink, send it to the small bank. They’d read the nonmagnetic ink by hand, figure it was a mistake and send it to the big bank. Big bank would read it by computer and send it back to the small bank.
Eventually somebody would notice the darn thing was getting worn out by being sent back and forth and the jig would be up.
Paperwork and human eyes. The bank would take your cheque and send it to the bank branch it came from with a request for the amount on the cheque to be transferred to them. This form would be filled out by hand and would most likely be for the total amount of cheques from that particular ban they received that day. The bank branch the cheque was drawn from, would then take that cheque, verify that there was enough in the account for it, deduct that amount, then send the money to the bank the cheque was deposited in. All by human eyes and usually an adding machine.
Though the actual cash money wouldn’t be transferred the day that the cheque is cleared. The bank would send confirmation that the money is there and then that amount would be added to the next regular armoured car shipment. That is until fractional banking and lending became a thing. At which point much of the money that was in circulation became entries in banking ledgers.
It’s basically the same way they do it now, but instead of computers it was humans.
I worked in SF in the 60’s. Every night banks would transfer their deposited checks with each other banks. Bof A would physically transfer Wells Fargo checks back to Wells and WellsFargo would physically send the BofA checks back to BofA. All the banks would transfer total $$ amounts electronically (60’s tech) The next morning workers would get trays full of cancelled checks and they would sort and file the checks into huge rotating file bins with your other checks. At the end of the month the bank would send back your monthly cashed checks with your statement via USPS. Crazy amounts of handled paperwork. I once handled a machine that sorted the statement and checks into envelopes for USPS mailing. (It always jammed.) Early credit card statements were handled the same way with the customer getting back their signed credit card slips with a billing total.
In the UK, we had and still have one central clearing house. all cheques from all over the country used to be physically delivered there for processing. Recently (as in the last 5 years) we switched over to digital presentation, finally allowing computer scans of cheques instead of the physical paper cheque and bringing processing times down from 5 working days to overnight or instant in some cases.
This was less burdensome than it sounds since the UK stopped relying on cheques for most transactions many years ago, cards took off here far faster and because we used chip and pin since it was invented cards were seen as far more trustworthy than cheques.
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