Magazine article American Banker

Banking Industry Reviewing Use of Routing Numbers

Magazine article American Banker

Banking Industry Reviewing Use of Routing Numbers

Article excerpt

NEW YORK -- For more than 70 years, routing numbers have been used on checks, serving as the "address" of the institution that makes payment. In this sense, the banking was using zip codes long before the post office embraced the concept.

The routing numbers permitted faster processing and, in the late 1950s, were an important element in the momentous development of a standardized method to automate the handling of checks. Unwritten policies were codified in 1976 when the American Bankers Association and the Federal Reserve System formulated guidelines for the issuing and use of routing numbers.

But since then, the financial services arena has undergone rapid change. Thanks to legal loopholes, a new kind of institution has emerged -- the so called "nonbank bank." And an explosion in the number of mergers and acquisitions has revamped the structures of other banking organizations.

Changes like these, as well as "ambiguities and loopholes" in the existing guidelines, have prompted a review of the policies on routing numbers. A group of representatives, working under the auspices of the banking association, has completed a six-page draft revision of the guidelines and is seeking comments from the industry.

"The proposed policy is not a major departure from the 1976 policy," Frederick T. Sauer, senior vice president at Union Bank in Los Angeles, said in a statement. "The major thrust of the changes is to reaffirm that the routing number exists primarily for the benefit of the collecting or presenting financial institution and is not intended to be a means for a paying bank to profit by delaying the collection of funds."

Each depository financial institution is required to have at least one routing number, but, in some cases, more than one is assigned.

Additional routing numbers are valuable because they enable institutions to automatically segregate special classes of item or customers. If an outlaying branch has its own routing number, checks drawn on that branch will be separated during processing from items issued by the main bank.

This provides a simple way, for example, of offering "controlled disbursement" accounts to corporate customers. These accounts are often opened in branches where check volume is comparatively small. Presentments to such branches are usually made early in the morning and, because the small volume can be processed quickly, the customer can be informed promptly as to how many checks will clear against his account that day. …

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