eli5: Why can’t banks call each other to velidate availability of funds?


Why are there laws to place such long holds on checks(10days)? Can’t the receiving bank simply call the bank where the check originates from and velidate it themselves?

In: 5

Imagine having to do that for tens of thousands of transactions a day. Just way too time consuming and not profitable enough to make it worth it. Also it could be considered a breach of privacy if one bank is sharing details of your account with another.

Ultimately the bank is trusting that your funds are there if you wrote a check saying they are. The wire process can take several business days itself, it’s not necessarily about confirming the availability of funds so much as just waiting for the money to transfer.

Banks receive thousands of checks a day… think of the manpower involved to do that. Think of the added costs involved, and how that would trickle down to bank customers.

Typically in the US, holds of this length only happen when you have a history of overdrafting or are depositing a large amount with a personal check or it is suspicious for some other reason.

In the US at least, there is a way to get an instantly clearing check by going to your bank and asking for a cashier’s check. This is basically your bank certifying that you have already set aside the cash into the bank’s account and the bank then writing a check to the recipient. Many places like car dealerships or real estate agents/mortgage brokers will only accept this kind of check.

They can, well not literally call, and many banks have systems (i.e. Zelle) that allows for cash transfers to happen instantly. It’s just that the Automatrd Clear House (ACH) protocols that all banks typically use are old and don’t support immediate or near immediate transfers. Wire transfers are possible but are more expensive. The US is about the start updating to a more instant protocol that will enable faster transfers of money, near real time. But it may take years for it to really be available.

They can. More importantly, they could do that automatically and electronically, and sometimes they do. But that is only part of the problem.

Suppose you have $1000 in your account.

You write three $1000 checks, to Alice, Bob, and Carol.

Alice deposits her check, her bank calls your bank and asks if you have $1000 in your account. You do, they say yes, Alice gets her $1000.

Bob deposits her check, his bank calls your bank and asks if you have $1000 in your account. You do, they say yes, Bob gets his $1000.

Carol deposits her check, her bank calls your bank and asks if you have $1000 in your account. You do, they say yes, Carol gets her $1000.

Later that day, all four banks meet up at the clearing house to settle up. Carol’s bank comes up to yours first, presents the check, and gets $1000. Bob’s bank comes up next, presents the check, and gets declined. Alice’s bank does likewise.

Bob and Alice are now each walking around with $1000 of their banks’ money.

The long holds give banks time to sort all of this out. It gives Bob’s and Carol’s banks time to come back and say, “nope, sorry, we tried, no good, also we’re charging you a $20 fee.” It’s dumb and it’s terrible but it’s the only real way to settle things when checks can take days to clear through the system and turn into actual transfers of real money. Even with electronic check processing — which has been the standard for decades now; they aren’t *actually* meeting up down at the clearinghouse — it usually takes two or three days for the actual funds transfers to occur when using paper checks.

Don’t use checks, checks suck.