by Charles Martin
This blog post is part of an ongoing series where we will introduce you to the basics and inner workings of our industry. We hope you will find useful information here. If you have ideas for further posts on the payment industry or specifically the check guarantee industry, feel free to contact us.
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Before you plan a funeral for checks, take another look. Paper checks, ACH, and the commerce they represent are still an important feature in today’s business transaction. In fact, they may save you money and continue to be an opportunity for increased cash flow in these tough times.
A Little History
Check acceptance, as an industry, is not a new one. Banks have been transferring money between parties in some fashion since Roman times. The Dutch began allowing “cashiers” to transfer funds between buyers and sellers of goods traded by “cheque” around 1500. The first printed checks are traced to 1762 and British banker Lawrence Childs. The word “check” also may have originated in England in the 1700s when serial numbers were placed on these pieces of paper as a way to keep trace of, or “check” on them. This history of banking is a good overview.
Before the tragedy of 9/11, checks and how they were processed remained unchanged except for the computer enhancements banks began to implement in the 70s. A person would complete information on a paper check, and when presented to a merchant for an exchange of goods the check was physically taken, usually by plane, to a bank for deposit. Upon deposit, the rules governing the flow of funds from one account (at the check writer’s bank) to another (the payee) were very clear: the check must arrive at the payer’s bank before any funds could be withdrawn. The time that transpired from deposit to payment was called “the float” and made it possible for payers to gather the necessary funds over a number of days before any concerns were raised over the money being available. What’s more, payees didn’t have real-time computer access to their bank accounts and were not able to verify amounts instantaneously like they do today.
Times have changed.
A New Day
On October 28, 2004, something called the Check Clearing for the 21st Century Act or “Check 21″ Act was made into Federal law. Part of the reason for this new law was that the system was arcane and needed improvements to mirror the technology that drives banks. Also, there were many risk-related flaws that the Federal Reserve found as as result of money transfers related to 9/11 that could be reduced or eliminated. This law made it possible for many changes, but most specifically it allowed for checks to be canceled without an actual check being present at the cashing bank. It subsequently made it impossible for banks to send most of the canceled checks on your account back in a statement. Electronically, everything was sped up and the longer float times were diminished to a few days. A “sub inclearing” check now means that you won’t have a paper copy of the actual check you wrote. It will be transmitted to your bank looking quite different. For more on the basics of check conversion, click here. For more on NACHA rules on business and consumer check conversion look at this link or our recent post on the increased use of ACH.
Credit card fees can be so high that some major industry associations like airlines are looking at ACH as a way to make the most of every sale. In fact, you’ll find that it will usually be less expensive to process these types of payments because today’s ACH and conversion rates from companies like NCT are usually less than that of a credit card merchant processor. NCT Check guarantee, an added security function for checks and ACH, remains a great value when compared with these other options.
Checks are an important feature in the payment cycle. They also continue to offer a great deal of fees for banks, which secures their future. And unlike credit cards, checks work across all user bases no matter the income level. In whatever form they present themselves, checks will be an integral part of commerce for years to come.
Tags: history of banking, history of checks, how ach works, how do checks work, paper checks, printed checks