Payments by Check

Date: 2015-10-07; view: 427.

Cash Payments

Retail Payment Systems

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At the retail level, most transactions use cash, i.e. notes and coins. However checks and plastic cards dominate in dollar volume because they typically involve more expensive purchases.

Cash is the preferred method for small payments because it is the only one that involves no credit, and therefore no promises. Checks are a form of credit and involve fixed costs that are independent of the amount of the check. Thus checks are seldom used or accepted for very small payments.

A check is an order to transfer funds from the payer's bank account to the payee's bank. Most small banks do not process checks themselves. Instead they send them either to a correspondent bank, with which they have an arrangement, or to the Fed which also provides that service. Both charge a fee. A check drawn on a bank outside the area of the local clearing house generally involves the use of the Fed's clearing facilities.

Float refers to checks in the process of clearing. When the payee deposits the check in his bank, he receives credit the same day for that amount. Until the check is processed through the clearing system, the payer continues to receive credit on his account. Thus float represents an interest-free short term loan to the payer. Credit cards offer a substantially longer float period. The benefit of float to credit card holders is one reason why debit cards have been relatively slow to catch on in the U.S.