An exception item refers to a check or Automated Clearing House (ACH) payment that the financial institution can’t process as usual. This can happen due to issues with the payment itself or due to a direct request by the payer. Exception items can lead to problems and costs for both banks and their customers.
Let’s look at what an exception item is, how this happens with payments, what banks do about such items, and how exception items affect banks and their customers.
Definition and Examples of an Exception Item
An exception item is a check or Automated Clearing House (ACH) payment that can’t be processed by a financial institution in the usual way either due to issues with the payment or due to a direct request by the payer.
Exception items can lead to problems and costs for banks and their customers.
When a financial institution can’t process and clear your check or ACH payment normally, the payment becomes an exception item that requires special handling. If the bank examines the payment but can’t resolve the issue automatically, the exception item results in the bank returning the payment.
This not only causes the payee to not get the funds, but your bank may also charge you a fee for the unsuccessful payment. The fee depends on the bank, but often runs $25-$35.
Exception items often involve checks that aren't readable or complete. For example, your bank might flag your check as an exception item if you forget to sign or endorse it, or you otherwise don’t completely fill it out. A check exception item can also result from an illegible check image that the bank uses for processing or problems with magnetic ink character recognition (MICR).
Exception Items in ACH Payments
For ACH payments, exceptions can occur if account information such as the account or routing number isn’t valid. Both ACH payment and check exception items can occur if your account lacks sufficient funds or if your bank has closed the account being drawn from.
In other cases, an exception item can result from your requesting a stop payment order from your bank. This will flag the check or ACH payment so that the financial institution doesn’t further process it. Reasons for stopping a payment can include having your check stolen or lost, realizing you made an error with the payment details, or experiencing an issue with the vendor.
A written stop-payment order usually applies for at least six months, after which, you can renew it through your financial institution. However, oral stop-payment orders can expire after two weeks unless confirmed.
You need to request the stop payment before processing completes, and you can usually do this through your online banking portal, in person at a local branch, or over the phone. However, your bank may also require a written request. In any case, the bank will need important details such as your account number, payee’s name, check number, and amount. Your bank may charge a fee for the service unless the reason is due to theft or loss.
How Does an Exception Item Work?
Banks handle most payments electronically these days. Along with the common use of ACH transfers such as direct deposits and bill payments, this includes the preference of electronic images for checks over paper copies. In some cases, the bank may not even have a paper copy of a check, such as when you make a remote check deposit and take pictures of the check rather than physically present it to the bank.
However, the widespread use of electronic payments can also lead to opportunities for exceptions. For example, you could easily remotely deposit an incomplete check or provide the wrong account details for an ACH payment. On the other hand, the check image your bank might create could end up unclear or distorted and delay processing until the original paper copy can be obtained or the missing information verified.
Due to issues that can occur with check images during mobile deposit, banks recommend you keep the paper copy in a safe place until the check successfully clears. That way, you can present the physical check or rescan it if the bank finds the images unreadable, or you can make corrections if the check is incomplete.
When an exception item occurs, problems can occur for both the financial institution and the customers involved. First, payees feel inconvenienced by unsuccessful payments that can disrupt their finances. At the same time, payers may pay various fees and end up with an exception hold on the funds. Further, the bank’s employees have to take extra time to try to resolve the exception. So a bank typically ends up spending money handling an exception error due to a bad check image.
Since handling exception items can be tedious, financial institutions often turn to automated exception item processing solutions to save time and money. Jack Henry Banking and Digital Check are two examples of providers. Such tools can automatically flag problematic payments so the bank’s employees can either resolve the issue or return the payments to the originating financial institution.
These tools can especially help with hard-to-read check images by boosting the image quality, removing distracting elements, and pulling key information from the check for further processing.
Consequences of Exception Items
To better understand how your bank might handle an exception item and the effects this can have, consider the following three examples:
You decide to use your bank’s app to remotely deposit a check. The banking app asks you to upload images of both sides of the check, but you forget to endorse the back of the check. When the bank evaluates your deposit, it flags the check as an exception item for the missing endorsement, and it notifies you of the issue. Since you still have the paper check, the bank allows you to simply endorse it and resubmit the deposit using the app. After that, the bank successfully processes the transaction since you resolved the error.
Let’s say you mail a check to a company to pay your bill. Between the time you mail the check and the company deposits it, your account balance becomes too low to cover the transaction. This triggers an exception item so that your check gets returned and the utility company doesn’t get the money. Your bank can charge a non-sufficient funds fee for the bounced check. Also, the company may charge a fee or even try to sue for not paying your bill successfully.
Perhaps you feel concerned a company is trying to defraud you, so you put a stop payment on a future ACH payment and pay your bank a fee for the request. When the company tries to take the money from your bank account, your bank doesn’t allow the payment to go through at that time, and this leads to an exception item. While your bank account retains those funds, the company may contact you to collect the money, especially if you’re under a contract. If the stop payment order expires and the company tries again, the payment could succeed.
- A bank can flag an ACH transfer or check as an exception item when it has some issue that prevents full processing.
- Exception items can result from bad check images, incorrect payment information, insufficient funds, a closed bank account, a stop payment order, and more.
- Banks lose time and money handling exception items, while customers encounter inconveniences and potential fees.
- Financial institutions often turn to automated exception item processing tools to enhance check images and flag potential issues more quickly.
- The steps to resolve an exception item will depend on the specific situation but can be as easy as re-uploading a check image or providing the correct account information.