Question

What types of banks are involved in the check collection process? How are these banks different?

Answer 1

The collection process is the system through which a bank receives payment for a check from an issuing bank. To put it more clearly, the bank that accepts a deposit check needs to collect money from the bank that issued the check. The collection process refers to the process through which such money can be collected by the depository bank. It is a key mechanism in America's overall system of checks and deposits, as it is the process that actually pays for those checks.

There are a number of different words used to describe the different parties in the collection process. Sometimes a group can fall under the two separate terms meaning. One of the key concepts in the collection process, for example, is that of the depository bank. The depository bank is the account where the check is deposited, the first bank after the issuing bank to keep the check. As a result, the depository bank is also the receiving bank, as the depository bank is the one that has to attempt to receive payment on the check. Therefore, in the collection process, the terms "depository bank" and "collecting bank" refer to the same party.
The other two important designations are' payer' and' intermediary bank.' The payer is the issuing account, the check's drawee. The payor is the bank that will receive compensation from the depository or the collecting fund. Intermediary banks are banks capable of holding and transmitting the check, essentially filling only gaps between the depository bank and the payor bank. The intermediary banks are not directly involved in the collection process because we simply facilitate collections between other banks

When the process of collection comes into play, the drawer of the check and the payee of the check will sometimes hold all accounts with the same bank. In such a situation, the collection process is streamlined as the bank does not need to contact any other institution and can manage the payment on its own. The downside of such transactions is that the bank no longer has any form of liability protection. Because it is the only bank involved in the transaction, then in the event of any fraud or forgery (apart from any liability held by the fraudster or forger him or herself) that bank would be held mostly responsible. But the payment itself could be completed very quickly and easily, with a simple credit extension to the payee and the drawee withdrawal of credit. For more information on how two of the same bank's customers perform transactions, please follow the link.