How do bank Cheques work? How can a bank accept one from another bank, whilst having different standards, shapes, paper material? How is forgery not rampant?

Question

I cannot wrap my head around the security of Cheques. They have been around since forever (and I still don’t get how they got verified, although I can understand that fraud could have been way higher back then).

Is there a unified standard for them? Or a proof that it is valid from the government?

In: Economics

Answer 1

You are asking about [cheque clearing](https://en.wikipedia.org/wiki/Cheque_clearing). You may have heard about people waiting for cheques to “clear” and so on.

Clearing is the process by which one bank checks with another bank that a particular cheque is valid. This used to involve having a physical clearing house where all the local banks would get together, have their own clerks, and swap the cheques they received that day (1700s-1800s).

There have been various different attempts to automate this process (e.g. adding numbers to the bottom of a cheque to help sort) and since the 1990s it has been done via taking pictures of the cheques, to save the banks having to physically move the cheques around. Obviously the increasing use of the Internet and computers has helped speed this process up.

The point of all this is that there is usually a delay between when someone pays in a cheque and when the money actually goes through. Even if their account is credited immediately, the money may not actually be there (and the bank can withdraw it) for a few days, until the cheque has “cleared.”

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And this can be abused for fraud. A common way would be for the fraudster to pay someone via cheque for something (knowing the cheque will not clear), and then convince the victim to provide whatever is (not) being paid for before the cheque has fully cleared (but after they have paid it in). The fraudster is then long gone when the cheque “bounces.”

As noted in another reply, “Catch Me If You Can” involves a lot of this kind of cheque fraud. One particular trick used there (pre photographs and so on) was using fraudulent cheques from US East Coast banks when trying to get money on the West Coast and vice versa, so the automated system the banks used for clearing the cheques would send them across the country (rather than checking them with the local branches of the same banks), making the clearing process take a few extra days – something the victims might not expect, so they’d think the cheque would have cleared.