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Bank Clearinghouses A clearinghouse is an institution that is used by banks to settle debits with one another with the smallest possible exchange of funds. These debits are the result of financial transactions by their customers who deposit checks or other instruments from a different financial institution, or write checks, which are presented to another financial institution. While in most cases a clearinghouse is a formal institution with written rules and regulations, they can also be based on informal arrangements among banks. There is a clearinghouse operated by an association of local banks in almost every city with more than two banks. The first clearinghouse ever was formed in London, in the late 1700’s. The first United States clearinghouse was formed in New Your City in 1853. Today, clearinghouses utilize automated check handling of paper checks. Also, purely electronic credits and debits are used in the Federal Reserve’s Automated Clearing House (ACH) network and result in much greater efficiency. In 1958 checks began to be imprinted with an MICR (magnetic ink character recognition) code along the bottom. This code contains data fields which identify the financial institution it is drawn on as well as the individual account. The MICR code allows electronic equipment to read and sort checks automatically. The MICR data can be used by itself to create electronic funds transfers to and from financial institution accounts without an actual paper check. Because the data is handled automatically, this electronic method of clearing transactions is much less prone to fraud than are paper transactions. On average a total of 9 people handle a paper check before it is returned to the check writer. This means that the potential for the misuse of a paper check is much greater than an electronic transaction. Copyright© 2000 by Business Cashflow Solutions, Inc. All rights reserved. Sources: The New Encyclopedia Britannica, Encyclopedia Britannica, Inc, Chicago, IL, 1998 Academic American Encyclopedia, Grolier, Incorporated, Danbury, CT, 1993 The World Book Encyclopedia, World Book, Inc., Chicago, IL, 1998 |
