Having described the method of collecting checks on city banks through the clearing house, or by direct collection in the case of those banks and bankers which do not have clearing house connections, it remains to account for "foreign" or out-of-town collections, that is, checks and drafts upon banks in other cities.
The practice of paying by check has become so extensive that banks are now required to make collections without regard to distance or trouble involved. Thus a merchant in New York may receive a check for a small amount due him drawn on a bank in a small town in Texas. After indorsing the check he sends it to his bank with other items for deposit, and gives himself no further concern about it. But the bank to get its pay must send the check to the bank on which it is drawn. In many cases checks are sent direct to the drawee bank, but more generally a different plan is followed. Most banks in the larger cities have an arrangement regarding collections and other matters with some bank, known as its "correspondent," in every other principal city. Thus it may be agreed that the New York bank shall send all its collections in the Southwest to its correspondent bank in Dallas, while the Dallas bank agrees to send all checks deposited with it drawn on banks in and around New York to the New York bank for collection. Under such an arrangement a statement of account between the two banks is interchanged periodically, once a week or once in two weeks, and the balance is remitted in cash, by New York draft, or otherwise as agreed upon. Such settlements may be made daily between correspondent banks in large cities.
It must not be understood that all out-of-town checks received by the bank are credited at once to the depositor's account; more frequently they are accepted for collection, in which case they are usually entered in a separate part of the depositor's pass book, or if there are many of these items, in a separate pass book designed for this purpose.
Out-of-town collection items are turned over to the corresponding clerk. He keeps a record of these with names, dates, amounts, the nanus of the banks on which they are drawn, and the correspondents to which they are to be sent. Checks that are to be sent to regular correspondents are stamped with the bank's indorsement, "Pay to Bank," or "Pay to any Bank or Banker." The stamp bears the name of the bank and its cashier, usually the date, and the guarantee "Prior indorsements guaranteed." The various items are charged to the several correspondent banks under the date they are sent out, in the collection or foreign ledger kept for this purpose. When the correspondent bank, say the Second National Bank of Dallas, Texas, receives these checks from the New York bank, it credits them to the account of the latter, sends a letter of acknowledgment, enters the several items in its own books, and makes the collections. It may be that some of them are drawn upon itself in which case they are charged to the account of the depositors who drew them. Others may be drawn against some other bank in Dallas; if it is a member of the local clearing house they will be collected by that means; otherwise they will be presented by runner for collection. Still other checks may be drawn upon banks in small towns near Dallas, and these after being indorsed by the Dallas bank will be forwarded for collection either direct or through the correspondent of the Dallas bank. In this way the collection of checks goes on until they are charged back to the accounts of the original drawers and remittances are made between the banks concerned.
The collection service of the bank embraces not only checks, but notes, drafts, money orders, interest coupons, etc. Such collection items as promissory notes and acceptances are treated somewhat differently from checks. Whenever possible, notes should be left with the collecting bank several days before maturity in order that they may be passed properly through the several books of the bank. All notes are carefully marked with the date of maturity. If a note should be marked one day too late and the drawer should fail to pay, the bank would be liable to the owner, as the notice of protest to the indorsers would be too late to hold them. After being marked with the maturity date, notes are recorded in the "Collection Register," from which they are copied into "Tickers." The actual collection of notes and drafts payable in another place is made through correspondents in much the same way as checks.
Sometimes a foreign check upon reaching the bank on which it is drawn proves not to be good. It is then the duty of the collecting bank to have it "protested" by a notary public and to send notice to indorsers. The unpaid check, draft, or note is returned with the certificate of protest to the bank from which it came. The account of the depositor who drew the check is charged with its amount together with the protest charges. The purpose of the protest is to have official acknowledgment that the instrument has been presented for payment and dishonored. Though not absolutely necessary in the case of domestic transactions, the practice of protesting unpaid paper is generally followed as it holds indorsers after they have been served with notice of the protest. Depositors sometimes stamp their checks "No protest," or attach a "sticker" with the same words, before depositing them. This is notice to collecting banks not to protest the items if not paid upon presentation at the drawer's bank, as the depositor does not wish to incur the expense of protest.