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The Brief History of Checking (Using Checks as For Money)

Note, this was written back in the 90’s. It relates to the early history of the eCheck movement.

Early Medium No one is sure when the first check was written or chiseled into a piece of wood or stone. Some experts think the Romans may have invented the check about 352 BC. But even if that were true, the idea apparently didn’t catch on. Banks or bank-like institutions existed in ancient Mesopotamia, Greece, and Rome, and probably transferred deposits from one account to another, but no documentary evidence of such transfers has survived.

Arrival of Cheques

The earliest evidence of deposits subject to “cheque” pertains to medieval Italy and Catalonia. In the primitive banks of deposits in those areas it was necessary for the depositor to appear in person before a banker either to withdraw funds or to transfer them to an account of another customer. The practice of using written instruments for those purposes gradually evolved.

Role of Cashiers

According to most history texts, it probably wasn’t until the early 1500s, in Holland, that the first check got widespread usage. Amsterdam in the sixteenth century was a major international shipping and trading center. People who had accumulated cash began depositing it with Dutch “cashiers”, for a fee, as a safer alternative to keeping the money at home. Eventually the cashiers agreed to pay their depositors’ debts out of the money in each account, based on the depositor’s written order or “note” to do so (the beginning of account-based bill payment). The concept of writing and depositing checks as a method of arranging payments soon spread to England around 1780 and elsewhere, but not without resistance. Many people in the sixteenth and seventeenth centuries still had doubts about trusting their hard-earned money to strangers and little pieces of paper that were easily forged or replicated.

Printed Checks

In the United States, checks are said to have first been used in 1681 when cash-strapped businessmen in Boston mortgaged their land to a “fund”, against which they could write checks. 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.

Problems Then and Today

As checks became more widely accepted, bankers discovered they had a big problem, which still exists in today’s society: how to move these pieces of paper to collect the money due from so many other banks. At first, each bank sent messengers to the other banks to present checks for collection, but that meant a lot of travelling and a lot of cash being hauled around in less than secure conditions.

A Solution

The solution to this problem was found in the 1700s, according to banking lore, at a British pub. The story goes that a London bank messenger stopped for a pint (or two) and noticed another bank messenger. They got to talking, realized that they each had checks drawn on the other’s bank, and decided to exchange them and save each other the extra trip. The practice evolved into a system of check “clearinghouses” – paper networks of banks that exchange checks with each other – that still is in use.

In addition to being able to exchange checks directly, today banks in the U.S. can present checks to the Federal Reserve System or private clearinghouses for regional and national check collection. During the check clearing process, checks pass through large sorting equipment that reads the magnetic ink characters (MICR) at the bottom of the check and places the check in sorting “pockets”. The MICR standard, developed in the US by a consensus group of banks and technology in the 1950s, provided tremendous improvements to the check payment process by enabling the automation of many check handling procedures. The MICR contains information such as the routing number identifying the drawee bank, the payment amount, and the customer account number of the payor. The payee’s bank is then credited for the payment amount, and it transfers these funds to the payee’s account. The check is then physically transported to the drawee’s bank by car, truck, or airplane, and presented to the drawee’s bank by the clearing institution where the payment amount is debited from the payor’s bank associated with the customer account number. The payor then receives the canceled physical check from the bank in the next statement.

Costs of Continued Use

There are approximately 70 billion checks written by consumers, businesses, and government entities today, at a cost of about 1% of the US Gross Domestic Product. Check fraud losses are estimated (see Footnote 1) to be over $53 billion annually with banks writing-off $1.34 billion and retailers and other payees absorbing $52 billion. Furthermore, it is predicted that check fraud will grow over the next 12 years by 12 to 15 percent annually.

More Solutions

Check truncation is seen by many industry specialists as a way to cope with the increasing volume of checks and the rising cost of check collection. Most check truncation schemes alter the normal flow of the check payment process in that check writers do not receive back their cancelled checks. Truncation requires the bank to convert the check data to electronic form, safekeep the checks, return checks at the request of the payor bank, and provide information on checks when requested. Although this processes has had only marginal success, early exchange of electronic data can reduce risk to participants of this service by permitting them to identify checks that cannot be paid and must be returned earlier than would otherwise be possible.

Imaging systems also hope to improve the check collection process. With image processing, checks are optically scanned to produce digital images. These images are then processed electronically and stored for later use. By providing images of checks to payor institutions, banks and other financial institutions are able to reduce their risk of paying forged or altered checks and may provide statements to customers containing the images of the checks that have been paid. The cost of image processing technology has limited its acceptance among most institutions.

Footnote 1: The Nilson Report, Number 600, July 1995

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