A clearing bank is a banking institution that is a member of a national check clearing network that has the ability to approve or clear checks for payment, even if those checks are not written on accounts associated with that bank. Typically, a clearing bank is a commercial bank. Depending on the structure of the system or network involved, the bank may be limited to clearing checks issued on accounts associated only with that network, although some networks do have reciprocity agreements with other national networks to quickly evaluate and clear checks written on out of network financial institutions.
The function of a clearing bank can often help expedite the transfer of funds from the payer’s account to the payee’s account. Depending on the policies of the individual clearing network, it can mean that on the day that the check is cleared, the face value of the check is credited to the payee’s account, and also debited to the payer’s account, even if they do not have accounts at the same institution. This type of activity can often be very helpful in business situations involving a large sum of money. For example, if the payee is holding goods or services for the payer until the check clears, the action of the clearing bank means the products are released in a shorter period of time, allowing the payer to receive those products sooner.
A clearing bank may also work with member banks to manage electronic funds transfers or standing payments between payer and payee accounts that are associated with more than a single bank. In the case of a standing payment, this simply means that the funds are withdrawn from the payer’s account, processed through the clearing bank, then deposited the same day into the payee’s account. One-time fund transfers can also be managed in the same basic manner, making it possible to send a payment that is posted within a matter of hours if necessary.
It is important to note that a clearing bank also offers the payee some level of protection. Since the clearing process requires that the funds to cover the check be present in the payer’s account at the time the evaluation begins, the payee is assured of only being credited if the payer does have the funds on hand to honor the check. This prevents the payee from receiving and depositing a worthless check, or a forged check that is written on a closed or non-existent account. From this perspective, the work of the clearing bank can be viewed as an effective tool for protecting bank customers from becoming victims of a scam or similar type of fraudulent activity.