Question

You are a resident of Seattle, Washington, and maintain a checking account with a bank in that city. You have just written a check on that bank to pay your tuition. Describe the process by which the banking system enables your college to collect the funds from your bank.

Answer 1

When a check is issued, it goes into the clearing process. Clearing is the process in which funds gets transferred from one bank account to another through the issuance of checks. Thus, through clearing, bank account in which check is deposited gets credited and bank account in which check is drawn gets debited. The process of fund transfer is done with the help of a clearing house. Clearing house is a centrl place where the representatives of all the banks in a particular area meet and exchange checks drawn on each other's banks.Clearing house operation is managed by the settlement bank

When a check is issued to the college for the payment of tuition, college will deposit the said check in its bank account. Then this check will be sent for clearing in the clearing house. With the help of clearing house, a debit will be made to my account and a credit will be made to the bank account of college. In this way, funds will move from my bank account to the bank account of college, without physical movement of cash between two banks.

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