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Before it accepts your check, Videomax will want to see some form of identification and perhaps some evidence of creditworthiness, like a credit card. The reason for its caution is that it has no way of knowing whether the check is good. If, when the check finally arrives at First National., it turns out that you have less than $700 in your deposit, the check will “bounce”. It will be returned unpaid to Videomax, reversing all the steps of the clearing process. Videomax will then have to do the best it can to collect the money from you in some other way. The possibility that a check may bounce reduces the acceptability of checks as a method of payment.

 Various ways have been devised to deal with this problem. One is the check guarantee card. A bank issues its customers a special card that must be presented whenever a check is written. The bank guarantees to honor checks written in this way up to some limit-say $200. If the check bounces, the bank takes the loss. Check guarantee cards are relatively rare in the United States, but they are quite popular in Europe. In France, banks must honor checks for amounts of 100 francs or less: no check card is required. Presumably this makes French banks more careful about handing our checkbooks.

If a check is drawn on a bank outside the area of the local clearinghouse, the procedure is more involved. For example, if First National is in Los Angeles and Metrobank is in New York, Metrobank will deposit your check at the New York Fed.

The New York Fed will credit Metrobank’s deposit with it for $700. The New York Fed then send the check to the San Fransisco Fed.

The San Fransisco Fed will send it on to its Los Angeles branch, which will take it to the local clearinghouse to present it to First National. Once the check has cleared, First National’s deposit with the San Fransisco Fed will be debited $700.

The physical transportation of paper checks is costly, both in the process of presentment and in the return of canceled checks to the depositor (banks in many countries do not do this). Attempts have been made, therefore, to use an image of the check, which can be transmitted electronically, rather the physical check itself. The Fed has introduced an experimental program and a group of large banks has set up its own system, Small Value Payments Corporation, to create an electronic check exchange network.