Legal Definitions - collecting bank

A collecting bank is any bank involved in the process of handling a check or other negotiable instrument for payment, with the exception of the bank on which the instrument is drawn (known as the "payor bank"). Its primary role is to act as an intermediary, facilitating the transfer of funds from the payor bank to the individual or entity who deposited the instrument.

Here are a few examples to illustrate the role of a collecting bank:

• Scenario 1: Everyday Check Deposit
  Imagine a small business, "Bright Ideas Inc.," receives a check from a client for services rendered. Bright Ideas Inc. deposits this check into its corporate checking account at "First National Bank." First National Bank then sends the check through the banking system to the client's bank, "City Central Bank," for payment. Once City Central Bank verifies the funds and pays, the money is credited to Bright Ideas Inc.'s account.

  How it illustrates the term: In this scenario, First National Bank is the collecting bank. It is handling the check for collection on behalf of Bright Ideas Inc., but it is not the bank that holds the client's funds (that would be City Central Bank, the payor bank).

• Scenario 2: International Payment for Goods
  An exporter in Canada sells specialized machinery to an importer in Germany. The importer pays using a "bill of exchange" (a type of payment order) drawn on their bank in Berlin. The Canadian exporter deposits this bill of exchange with their local bank in Toronto, "Maple Leaf Bank." Maple Leaf Bank then forwards the bill through its correspondent banking network to a bank in Germany, which presents it to the importer's bank in Berlin for payment.

  How it illustrates the term: Here, Maple Leaf Bank (and any other intermediary banks it uses before reaching the importer's bank) acts as a collecting bank. It is responsible for presenting the bill of exchange and collecting the payment from the German payor bank on behalf of the Canadian exporter.

• Scenario 3: Remote Deposit Capture
  A freelance graphic designer receives a physical check from a client. Instead of going to a branch, the designer uses their mobile banking app to deposit the check by taking a picture of it. The designer's bank, "Digital Trust Bank," processes this digital image and initiates the collection process to get the funds from the client's bank.

  How it illustrates the term:Digital Trust Bank is the collecting bank. Even though the physical check itself isn't physically transported by the designer, Digital Trust Bank is still undertaking the legal and operational steps to collect the funds from the client's bank based on the digital image, acting as an intermediary in the payment chain.