When someone writes you a check and you deposit it into your checking account, your bank is acting as the bank of first deposit. In other words, they’re the institution that deposited the funds.
Learn how a bank of first deposit works, along with examples of how an institution may process checks differently based on who issued them.
Definition and Examples of a Bank of First Deposit
A bank of first deposit refers to the financial institution that originally deposits a check. Depending on where the check is coming from, the bank could process it as an “on-us” item or an “off-us” item.
- Alternate definition: The institution responsible for receiving any checks returned due to insufficient funds.
- Acronym: BOFD
For example, say your mom sends you money for your birthday. She’s a little leery about sending cash in the mail, so she writes you a check instead. She banks with BB&T and you bank with Ally Bank.
In this case, BB&T (your mom’s bank) is the paying bank. Ally Bank (where you’re depositing the check) is the BOFD. Because these are two different institutions, the check is processed as an “off-us” item. Ally Bank will therefore have to use a third-party system to clear the check with BB&T once you deposit it.
How a Bank of First Deposit Works
Each time you deposit a check into your account, your bank is referred to as the BOFD.
The bank that drafts, or creates, the check is known as the paying bank. If the BOFD and the paying bank are the same, the check is processed as an “on-us” item. If the two banks are different, it’s considered an “off-us” item and the paying bank has to use a third-party system—such as a mutual clearinghouse or correspondent bank—to clear the check.
For example, suppose you bank with Wells Fargo and so does the company you work for. When that company processes your paycheck, Wells Fargo acts as both the paying bank (e.g. the bank that drafted your paycheck) and the BOFD (the bank that deposited your paycheck). In this case, the transaction gets processed as an “on-us” item. The entire transaction takes place under one roof as Wells Fargo simply moves money from one of its accounts to another.
But, if your company banked with Wells Fargo and you used a local credit union, then your local credit union would have to use a third-party system to clear the check with Wells Fargo once you deposited it. In this case, your local credit union would have three main options for clearing the check.
Three Ways a BOFD Can Clear a Check
Deliver It Themselves
The first option is for your credit union to mail the physical check to Wells Fargo. This method used to be popular in the 1900s. But thanks to the rise and technology and the passing of the Check 21 Act in 2003, now it’s more common for banks to clear checks using electronic images instead.
Use a Clearninghouse
If your credit union uses the same clearinghouse as Wells Fargo, it could settle the check with them using that network. In this case, the clearinghouse could be the Federal Reserve or another network. Clearinghouses are typically cheaper than going through an intermediary or correspondent bank.
Use a Correspondent Bank
If the two banks are not part of the same clearinghouse, they could use a correspondent bank to settle the transaction. Correspondent banks are typically large commercial banks that have the equipment needed to sort, process, and clear large volumes of checks every day.
As you can imagine, it’s cheaper, quicker, and more efficient for your BOFD to process “on-us” items because the money never leaves the institution. It takes longer for checks to clear—and can be more expensive—when the bank of first deposit has to go through a third-party system to settle its end of the transaction.
- A bank of first deposit (BOFD) refers to the financial institution that deposits a check into a customer’s account.
- If the BOFD is the same as the bank that issues the check, it’s processed as an “on-us” item. Because on-us items are settled in-house, they’re quicker and more cost-effective.
- If the BOFD is different from the bank that issues the check, it’s processed as an “off-us” item. Banks typically have to use a clearinghouse or correspondent bank to process “off-us” items.
- If a check is returned due to insufficient funds, it’s sent back to the BOFD.