Legal Definitions - collection

In banking, collection refers to the specific internal process a bank undertakes when it receives a payment instruction, such as a check, an electronic debit, or a bank draft, that is drawn on an account held at that very bank. This bank, known as the 'payor bank,' must then verify the instruction, ensure sufficient funds are available, and ultimately debit the customer's account to complete the payment. It describes the journey of a payment item from the moment it arrives at the bank responsible for paying it, through its internal processing, until the funds are disbursed.

• Scenario 1: Processing a Personal Check

  Imagine Sarah writes a check from her account at "Riverbend Bank" to pay her landlord, Mark. Mark deposits this check into his account at "City Bank." City Bank then sends the check to Riverbend Bank for payment. The "collection" process occurs within Riverbend Bank. Riverbend Bank receives the check, verifies Sarah's signature, checks her account balance, and then debits her account to transfer the funds to City Bank for Mark. This entire internal handling by Riverbend Bank is the collection process.

• Scenario 2: Handling an Automated Bill Payment

  David has set up an automatic monthly payment for his internet bill directly from his checking account at "National Savings Bank." When the internet provider initiates the electronic request for payment, National Savings Bank receives this digital instruction. The "collection" process takes place within National Savings Bank as it processes this electronic item, confirms the payment authorization, and debits David's account to send the funds to the internet provider. The internal steps the bank takes to fulfill this electronic payment constitute collection.

• Scenario 3: Paying a Bank's Own Draft

  A construction company purchases a large bank draft (similar to a cashier's check) from "Apex Bank" to pay a supplier. The supplier deposits this bank draft into their account at "Summit Bank." Summit Bank then presents the draft to Apex Bank for payment. The "collection" process happens within Apex Bank. Apex Bank, as the issuer and payor of its own draft, verifies the legitimacy of the draft and then transfers the necessary funds from its own reserves to Summit Bank to complete the payment. The internal validation and fund transfer by Apex Bank is the collection process for that item.