Recently, as I was electronically depositing my check to my credit union, I thought back to how check deposits and processing of checks were handled when I was hired by NCR in 1979. Over the past few decades, the technology and processes required for processing checks have changed significantly, especially when one considers the maturation of ACH payments, debit card emergence, credit card usage, online account transfers, check imaging and transmit capabilities, and more.
A trip down memory lane
Despite the predictions for many years that the paper check would be long gone by now, that has yet to happen. In some ways, things often don’t change quite as quickly as people imagine. However, the process for these checks has changed entirely. Things are certainly different, but it is always interesting to reflect back—in this case, let’s travel back to about 40 years ago.
At that time, the focus was entirely on the handling of paper. Although financial institutions varied somewhat in how they processed daily checks depending upon size, volume, location, etc. the general process was fairly similar.
Prior to 1980, writing the actual check was perhaps the easiest step in the overall process. It’s sometimes hard to imagine that at that time, the system involved teams of people and trains, planes, and automobiles for getting checks routed and posted. For example, in 1979, 86% of all non-cash payments nationwide were made by paper checks—a total of 33 billion checks. For reference, the number of annual checks written peaked in 1995 at 49.5 billion. By 2021, the volume of checks was less than 15 billion and was decreasing by 7-8% annually.
The life of a check
In 1979, the life cycle of a check often started at the teller line. Deposited checks were typically separated into two categories: internal (to be handled by the credit union) and transit (outside the financial institution—checks delivered to clearing houses nationally). Tellers would then go through a balancing process each evening to ensure the paper checks deposited for that day matched what their transaction ledger showed.
In most cases, this was entirely an offline process. Depending on the financial institution, tellers would key their transactions into a standalone teller machine which would accumulate totals for the end-of-day balancing. Online terminal technology was still maturing (non-intelligent CRTs; PC technology just emerging) and the cost of implementing these devices on a branch-by-branch basis was often cost-prohibitive.
Additionally, the transaction capabilities the devices could perform were pretty minimal as computer software for interactively processing teller transactions was still evolving. Not to mention data line communications were another big challenge, as the capability to upload daily transactions to a mainframe system via modems or leased lines was quite slow (i.e. 1,200-2,400 baud, yikes!), expensive, and often unreliable.
Taking on transit
Once balanced, checks were microfilmed, batched with teller tapes attached, logged, and placed in secure bags for delivery to their institution’s proof department or potentially the Federal Reserve Bank or Clearinghouse (i.e., transit checks) as a cash letter. Depending upon proximity, these were often delivered via a contracted third-party courier service.
Based upon the distance and number of stops a courier needed to make, weather conditions, mechanical breakdowns, etc. it could take many hours and potentially hundreds of miles for the checks to arrive at a central proof location. In essence, depending upon the check volume of the financial institution, and the timing for which multiple couriers may arrive, the proof operation would often extend until very late at night.
Were bags ever lost during transit? Yes, indeed! For example, one bag of checks being transported to my CUSO back in the day was lost while being loaded onto an airplane. Despite the best courier search, it was never located until the following Spring—in a bank of plowed snow next to the runway!
Obviously, it was never a fun process to recreate lost checks by working from teller tapes, microfilm, and re-contacting customers. In 1979, it took an average of three days or more for a check to be fully processed from the time being presented to a teller and required being handled as many as six times.
The process of processing
Upon arrival, the equipment used to process the paper checks was often extensive. Depending on the institution’s processing size and internal equipment, a proof department commonly had dozens of proof machines, with each unit being four to ten feet in length depending on the number of check sorting “pockets” each proof machine had. These machines required a lot of floor space!
Upon receiving a batch of checks, the hand-written dollar amount and desired pocket number were keyed in by the proof operator and the check was then placed in the proof machine track to be MICR encoded, endorsed (the institution’s processed routing #, date, sequence number), and sorted accordingly. Typically, an experienced proof operator could process 1,000-1,200 checks per hour.
Upon having keyed a batch of checks, the proof operator would then be responsible for ensuring the dollar totals balanced to the paper batch total as originally presented. If not, the proof operator would then need to begin matching the proof machine tape to the original (teller) batch tapes to determine which checks were potentially keyed incorrectly. Once located, corrective tape was placed over the incorrect MICR, and the operator would re-run those checks to delete the incorrect amount and re-encode the check to update their proof machine totals.
Depending on the number of checks per batch in error, this process could take a fair amount of time. In many cases, if the error could not be determined, the proof department would need to contact the branch teller the following morning to help determine why a batch may be out of balance.
A mountain of sorting
Following the proof operation, checks would generally be loaded onto large reader and sorter machines. These were high-speed machines that could read the MICR line to automatically re-sort the checks into various bins (typically by financial institution routing number, customer account number, check number).
They would also apply a sprayed-on sequence number on each check, microfilm, and capture the MICR data—normally to a magnetic tape or removable disk platter and provide various batch and check reporting capabilities. The accumulated data would then be uploaded via mag. tape or disk platters to the mainframe system for storing and eventually posted to the customer’s checking account—a separate operations process.
Finally, the paper checks would be grouped and stored at the institution for being batched and mailed back to the customer as their monthly checking account statement was being prepared. Obviously, the cost for a financial institution to store and deliver original paper checks back to its customers was extremely costly.
How time flies!
Whew—that’s about it, at least at a higher level for how internal checks were processed. It’s sometimes hard to recall the extensive check handling, routing, and manual efforts required when we compare to today’s automated data imaging, high-speed transmission, and posting capabilities—much of which happened as a result of 9/11.
As a final comparison, my CUSO once had three buildings and 33 staff dedicated to the daily check processing operation. Today, we only require four employees for performing all check processing-related services for our clients.
Perhaps, in an upcoming article, we’ll examine how checks are processed in 2022—and compare that to the late 1970s, including the consideration for managing “check float” in previous years. Time truly does fly by quickly!
Hi! Enjoyed article, very nicely done … Had no idea there was so much transport in the financial system until I read in Ben Bernanke’s book that check processing used to require a fleet of aircraft somehow. You’ve cleared up why this might be!
I’d really like to know why or how 9/11 catalyzed advancements, as you state at the end. Please advise, or assign me some reading! Some of my long-term plans involve, say, working toward better banking. A wise man once stated that if you want to see real change in the world, you’d have to change how money works. Unsure how/what he meant, but I believe it!