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What Is Check Clearing?

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Last editedDec 20212 min read

Simply put, check clearing, also known as bank clearance, is the process of moving a check and its accompanying funds from an account with one bank to an account with a different bank. In this post we’ll provide a detailed answer to the question what is check clearing and explain precisely what it entails.

Check clearing definition

A succinct definition of check clearing is the movement of cash from the bank at which a check is drawn (drawing bank) to the bank which is set to receive the funds (the depositing bank). This movement can be physical, as the check is transported in its physical form, or it may be sent via digital means as part of the check truncation system.

The process as a whole is known as the clearing cycle. Once the cycle is complete, the account holder who wrote the check will see a debit of the funds on their account, whereas the receiver will see a deposit of the funds in their account.

In the case that the issuing account holder does not have sufficient funds on their account for the check to be cleared, it will bounce and is referred to as a “dishonored check”. For this reason, it is essential that the required funds are available on the debiting account before a check is written. It is technically illegal to write a check knowing full well that there are not sufficient funds on the account for the check to be honored. A common scam which involves writing checks in the knowledge that there are not enough funds for them to clear is known as check kiting.

History of check clearing

The first US clearing house was opened by The Suffolk Bank in 1818 in Boston. Americans made a number of improvements to the British check clearing system. They did this by starting a Clearing House Association in New York in which two bank clerks worked simultaneously as opposed to just one clerk in London. This sped up the process and made it more efficient.

What does it mean when a check is cleared?

When an individual comes to a bank to deposit their check, the bank will respond by immediately crediting the depositor’s account with the funds stated on the check. However, while the funds will be visible on the customer’s account, they will not be available until the check has cleared.

If the recipient of the check belongs to the same bank as the person who wrote the check, then the bank will, usually by the next business day, verify that the check is in order and debit the account of the drawer. Following this, the check is said to be cleared.

As for what does it mean when a check is cleared, in this case it means that the check is in order and therefore can be debited from the drawer and credited to the payee. For the check to be in order, it must have a valid date, a valid signature belonging to the drawer and be a real, verifiable check. It is also essential that there are sufficient funds on the drawer’s account to complete the transaction.

When a check is drawn from another bank, called either the issuing bank or the paying bank, then the check must be presented to the deposit bank prior to the check being cleared.

If for any reason, a check is not confirmed to be in order, either due to insufficient funds or a false signature, then the check is returned, marked as a dishonored check and a request is made that the check be rewritten or alternative methods of payment pursued.

What are cleared checks?

Cleared checks therefore refers to checks which have been successfully processed and the funds have made their way from the drawer's account to the depositing account. The time it takes for a check to clear will vary but is usually less than five working days.

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