A Full Overview of Deposits
A deposit is the action taken when a payee gives a check to a bank so that the bank will add the value of the check to the payee's account with that bank. The payee is giving the bank the money so that the payee may then draw it out of the bank at a later point.
Sometimes the payee will deposit the money directly into a checking account so that it may be drawn from the account with ease. Other times, the depositor will put the money into a savings account so that it might accrue interest. Regardless, the act would be considered a deposit and would be subject to the rules and characteristics of deposits.
The checking system relies upon money being in the drawer's account in order to support payment on the check. Deposits are the method by which this money is put into the account. Deposits, then, are one of the more important differences between the modern use of checks and the use of checks in their initial form, when checks were actually closer to promissory notes and indicated only debt between two parties. With the addition of a third party, the bank, and deposits which then allow the bank to pay off the check, the process changed significantly into what it is today.
Deposits actually outline exactly how the current system functions in that it does not take the form that most might imagine. Deposits are not payments made to the bank such that the bank can store those funds for the depositor's later withdrawal. In actuality, deposits are loans made to a bank which can be called in at any time. A check simply allows the depositor to direct the bank to pay the loan directly to a third party instead of to the depositor him or herself. To find out more about the basic history and nature of checks and deposits, follow the link.
Expedited Funds Availability Act (EFAA) of 1987
The Expedited Funds Availability Act of 1987 was designed to protect customers from a previously common practice of banks. Before the Act, a bank could hold off on processing a deposit, and thereby prevent the depositor from gaining access to the funds of the deposit for some time. This practice would lead to complaints and anger from customers, as they would overdraw accounts, thinking that they had made a deposit which would cover their purchases.
The Expedited Funds Availability Act set specific time limits on the amount of time that a bank could take before processing that check and depositing funds into the account. The amounts of time are relatively variable, but depend primarily on the categories of the amount of the checks being deposited, whether or not they are local, and whether or not there are any extra factors.
A check for more money, for example, would hold a greater significance to the bank if it were to be held liable for such a check, and as a result, a bank can hold such a check for a longer time period in order to ensure the check's validity. Non-local checks are similarly slightly more suspect, and the bank is allowed a bit more time to investigate them.
Exceptions that might affect the amount of time available to a bank for holding a check include whether or not the account from which the check is drawn has been overdrawn for some time, or for a large amount of money. For more about these circumstances and the time limits enforced under the Expedited Funds Availability Act, click the link.
Other Requirements
In order to make a bank deposit, the customer must perform certain actions. The customer generally will need to provide the bank with a deposit slip containing information about the account into which the deposit is meant to go and each check in the deposit. The total amount of the deposit and the routing numbers of those checks, and of the depository account, will also likely be important. The deposit slip may even require a signature from the depositor.
Furthermore, every check being deposited will have to have been endorsed properly by the payee, such that those checks may be deposited. If the depositor wants to be perfectly safe, then he or she should only endorse those checks at the bank, in front of a teller, and should do so with a restrictive endorsement stating "For Deposit Only", as well as include the account number of the account into which the deposit is going. The bank, then, would have certain responsibilities to the depositor.
The bank would have a limited amount of time under which to process the deposit based on the EFAA. The bank would also have to ensure that when the account holder does draw the funds from the account, after they have been successfully deposited, that they are available for the proper methods of withdrawal.
Additionally, the bank would have a duty to confirm the deposit and ensure that the customer made no mistakes in calculation. Follow the link for more information about the additional duties that customers might have in making a deposit and that a bank might have towards the customer.
Interest Accounts
An interest account is a depository account on which the account holder can earn interest. This is a valuable type of account because it allows the account holder to earn money on funds which would otherwise be static and unchanging. Money in a bank account does not do the account holder any good in terms of making more money unless the account is an interest account.
There are different kinds of interest accounts, each of which is oriented towards a slightly different goal. A checking account, for example, might even be an interest account, but generally speaking, the interest on a checking account will be so phenomenally low that the account will generate next to nothing, as the primary advantage of a checking account is the ease of transaction and not the interest.
Another primary type of interest account is a savings account. Savings accounts will generally have much better interest rates than will other types of accounts, but the money in a savings account is nowhere near as immediately accessible as it would be in a checking account. There might be a charge, for instance, to withdraw money from a savings account. But one can be relatively assured of the safety of one's money and of making some profit on money deposited into a savings account.
A money market account is something of a combination between the two and is a competitor to money market funds. With a money market, the money is more accessible than it might be in a savings account and would still have higher interest rates than it would in a checking account. To find out more about each of these different types of interest account, click the link.
Collection Process
The process through which a depository bank has to collect the money deposited into it is not terribly simplistic. The depository bank must send the check to the payor bank, and the payor bank must issue credit to the depository bank, such that the depository bank can then issue credit to the individual account of the depositor.
There are numerous intricacies to this process, including the fact that transactions must function differently when they take place between customers of the same bank than they do when they take place between customers of different banks. Furthermore, the Federal Reserve System plays an important role in the collection process that should not be overlooked, as it performs many of the transactions between banks, thereby both enforcing the validity of those transactions and protecting them so that the customer will not be injured.
The collection process is also significantly changing with the advent of the Internet and digital communications, as they provide avenues for collecting money which are significantly easier, faster, and cheaper than the physical processes used in the past. Even simplistically, sending a digital image of a check is cheaper than sending the physical check. For more information on the collection process and its many changing components, follow the link.
