Check Payment Processing

Some forty years ago, all of the check payment processing in the US was performed manually. As per the process used then, a paper check was presented by a customer at a bank for making a payment deposit into his/her account. The bank then sent the check in original to the bank of the person who had drawn the check.

There were three reasons for this. The first reason was to find whether sufficient balance was available in that person's account for that payment to be debited from his/her account. The second reason was to verify that person's signature on the check. The third reason was to enable that person's bank to debit that person's account with the amount written on the check.

The person's bank branch could be in the same city as that of the check presenting bank customer or in another city. In case it was in the same city, the to and fro movement of the check took two to three days before the payment could be credited into the account of the check presenting bank customer. In case the other bank was in another city, the movement could take anything between a period of one week to three weeks, depending upon how far the other city was located.

The other aspect of all this was that considerable courier/postage expenses had to be borne by the two banks for the movement of the check from one bank to another and back. This contributed largely to the check processing cost.

This check payment processing procedure changed in the 1960s. Checks began to be processed in automated clearing houses (ACH). The main advantage of check processing in clearing houses at that time was electronic data interchange (EDI) and electronic fund transfer (EFT) through use of computers. However, it still involved delays in the movement of paper checks and those in entering the check details on paper. It also involved labor costs in entering the data on paper.

It gradually became known that the delays in check processing through this method were primarily because of different formats being used by different companies for transmitting electronic data and funds associated with checks. By the 1970s, a consensus began to be formed for the use of a standard format for electronic data interchange and electronic fund transfer associated with checks.

The ACH check processing mechanism really became much more efficient with the advance in scanning technology and the development of magnetic ink character recognition (MICR) technology. With these developments, check processing was initiated through use of a check processing machine and check processing software that could recognize and identify the unique MICR code mentioned on the check drawn on any particular bank branch.

In the year 2004, with the advent of the Check 21 law passed by the US government, the original check movement between banks was replaced by a scanned image of the check to reduce the check movement time and associated cost. This mechanism is today being used for check payment processing in almost all parts of the world.