When checks are exchanged between customers at two
different banks, then the process necessitates interaction between those
financial institutions which might extend the process somewhat. In such a case,
the depository bank will likely attempt to obtain funds from the drawee or
payor bank so as to add those funds to the customer’s checking account. To do
so, the depository bank must present the check to the payor bank for payment.
This can be done directly, or indirectly through intermediary banks. In
presenting the check to the payor bank, the depository bank becomes liable from
presentation warranties.
If the check is passed through intermediary banks, then
each of those
intermediary financial institutions would have only until midnight
of the next banking day after having received the check to pass it on to the
next financial institution. The payor bank, upon receiving the presented check,
would have the same time limit (until midnight on the next banking day after it
is received) to return the check to the depository bank or to dishonor the
check. Otherwise, the payor would be required to pay the full value of the
check from the connected checking account into the checking account of the
payee.
There are some exceptions and extra elements to this
process, allowing leeway to these time requirements. For instance, if a payor
bank did not receive a given check until 3 pm, then it might not have enough
time to take the necessary action on that day, as it would likely have any
number of other transactions to perform concerning its checking accounts. As a
result, financial institutions are allowed to set up a cutoff hour in order to
clearly delineate which checks will be processed on any given day. The cutoff
hour must be 2 pm or later, but any checks received after that time would be
treated as if the financial institutions in question received them at the
beginning of the next banking day, thereby giving those financial institutions
more time to deal with checking issues.
Such a time extension is important for the collections
process, as it will allow the payor bank to have some time to determine whether
or not to actually pay on the check. While the payor bank is not under any
obligation to do so and cannot be held liable if it does not, it is still in every
financial institution’s favor to examine checks and ensure that they are to be paid before
issuing payment on them. Doing so would minimize the chances of issuing payment
to a checking account based on a forged or otherwise invalidated check and would
save all involved banks a great deal of time and effort.
