A check is a written order on a credit union, bank, or savings institution, by the account owner, payable on demand to the person named on the check (payee), to that person’s order, or the bearer. The check is drawn on funds on deposit in the account owner’s checking account.
On demand? That means the financial institution, by contract with the account owner, must honor the check unless there are not sufficient funds in the account to cover it.
To that person’s order? If you look on the front of a check, you’ll see the words Pay to the Order Of at the beginning of the line where you write the payee’s name. This language is one of the things that legally makes a piece of paper a check. Payees communicate their orders with the type of endorsement they write on the back. If the payee simply signs their name on the back, then the bearer (any person who has the signed check) can legally cash or deposit the check.
Your checks will usually be personalized for you. They will have your name, address, the financial institution name, and a check number printed on the face. It’s recommended you add your telephone number as well. This helps payees feel more comfortable accepting your check.
The numbers that appear along the bottom of the check are pre-printed in special magnetic ink that can be read by magnetic ink character readers (MICR). Starting from the left, there are three numbers. The first is the routing and transit or ABA number. This number identifies the financial institution. The next number represents the checking account. At many institutions, this is your account number. The final number is the number of your check. It matches the check number usually found in the upper right corner of the check.
When you pay someone by check, your check begins a long journey. If you pay someone out of the area, here’s what typically happens:
- The payee will endorse the check and deposit or cash it at their financial institution.
- That institution will credit their customer’s account.
- Before the end of the day, they will process the check, then deposit it with others received that day at the local Federal Reserve Bank branch. To get credit, the checks have to be at the Fed by a certain time each day. Many banks used to close at 2 p.m. so they could meet that schedule with the day’s checks.
- The Federal Reserve will send the check to their branch closest to your financial institution.
- Next the check goes to your financial institution or their check processing firm.
- When presented with the check, the institution will determine if there are sufficient funds to honor the check, either in the account or through overdraft protection. If the funds are available, the institution will withdraw them from your account and transfer them to the Federal Reserve. If there are not sufficient funds, the institution will return (or bounce) the check back through the system.
The MICR numbers at the bottom enable the efficient travel of your check through this payment system. Some people wonder why the names of their payees don’t show up on their statements. That’s because MICRs only recognize the institution, account number, check number, and amount. Adding payee names to statements would be a costly, slow, manual error-prone process.