There’s been an increase in consumers and businesses using non-cash and check payment options like NFC mobile payments, credit and debit cards, and ACH transactions. And while industry data shows that while the number of consumers that prefer to use checks to pay bills declined by 23% between 2015 to 2018, checks haven’t completely disappeared from the U.S. payment landscape. Seven percent of transactions were done by checks, and consumers wrote an average of three monthly checks.
It’s not uncommon for businesses to offer their customers multiple payment options, including checks. While most transactions take place without a hitch, every once in a while, a payment doesn’t go through, and a check bounces.
But what exactly happens when one of your customers writes a bad check and has insufficient funds to pay for a purchase? And when banks charge a returned check fee, who’s responsible for paying it?
In this article, we’ll bring you up to speed on everything you need to know about returned check fees, including what they are, how much they cost, and how to prevent them.
TL;DR
- A returned check fee (also called a bounced check fee) is a cost that must be paid when a payment made by check can’t go through or bounces.
- Writing a bad check can cost anywhere between $35 to $70. However, as the receiver of the check, you generally don’t have to worry about paying any of the returned check fees.
- You can try to prevent these fees by canceling them as soon as you’ve realized, contacting your financial institution, or making long-term financial changes.
What’s a Returned Check Fee?
Financial institutions like banks or credit unions provide customers with checking accounts, from which they can write checks to send money or make payments. These creditors or lenders charge various fees to stay profitable: service fees and penalties.
Service fees include things like a monthly maintenance charge or a bank fee for an international transfer. Penalties, meanwhile, can include things like a non-sufficient funds fee (NSF fee) or a late fee. Penalties are punitive in nature, which means their goal is to try to stop the consumer from repeating the behavior again.
A returned check fee (also called a bounced check fee) must be paid when a payment made by check can’t go through or bounces. This could be because the account balance is too low but might be because the account has been closed or frozen. If you try to deposit a bounced check, state laws allow the receiver of the check or the creditor to try to get back the money lost from trying to deposit the check, which is where returned check fees come in.
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What a returned check costs
If a customer sends your business a bad check and you try to cash it, there are a few potential fees that the recipient may get hit with.
Let’s say a customer writes your company a check for $300 for services rendered. If their checking account only has $250 in it, that’s not enough to complete the payment, leading to the fees. While data shows that the median is around $12, some banks, such as American Express, charge $38 for a returned payment.
However, that’s not the only fee the check writer faces. If they had set up overdraft protection on their account, the recipient would be able to cash the check, although the checking account would be overdrawn by $50. While this is a good backup solution in emergency situations, there’s the possibility that overdraft protection comes with an overdraft fee, which can be as much as $35. In fact, larger banks like Wells Fargo or Bank of America each made over $1 billion overdraft fees in 2021. For smaller banks, overdraft fees provided as much as a third of their non-interest income.
However, if the check writer doesn’t have overdraft protection on their account, they’ll keep the $250 in their account, and instead get charged an NSF fee, which averages at $34, according to the Consumer Financial Protection Bureau. Writing a bad check can cost between $35 to nearly $70—quite a pretty penny!
However, there is good news on the horizon: recently, steep fees have been under regulatory scrutiny, as many financial institutions are heavily reliant on overdraft fees. Many larger banks have started to drop their overdraft fees, so it’s likely that this trend will continue down the road.
As the receiver of the check, you generally don’t have to worry about paying any of the returned check fees. The responsibility of paying those fees lies not with the merchant, but with the check writer. However, if you’re notified by the sender that they don’t have sufficient funds, it’s best to hold off and try to deposit the check once they have enough money.
Other consequences of returned checks
While paying up bounced check fees might be a customer’s biggest concern, it might not be the only issue they face. While bounced checks aren’t usually reported to credit reporting agencies, there’s a chance the information might be sent to a consumer reporting agency like ChexSystems. If this happens repeatedly, it’ll be harder to open another bank account. This could also lead to the bank closing the customer’s account; if bounced checks lead to regular late payments, it could affect the customer’s credit score.
By informing your customers about the potential ramifications of a bounced check, you might help reduce the likelihood of dealing with a late payment.
How To Prevent Returned Check Fees
- Check if it’s cleared. Once you’ve sent a bad check, try to see if you can cancel or stop it as soon as you realize it. Even if you need to pay a fee, it’ll be less than all the returned check fees.
- Contact the receiver. If that doesn’t work, let the receiver of the check know what’s going on. They may not try to deposit it, which could save you some fees.
- Contact your financial institution. Banks or credit unions may waive all the fees if it’s your first time sending a bad check and have a solid banking history. However, this isn’t a given. If you’re still expected to pay up, make sure you have enough funds in your checking or deposit account: both for the original check, as well as any fees.
- Make habitual changes. If you regularly find yourself in this situation, it may be a smart move to set up a budget or regularly balance your checkbook, which will likely pay off in dividends down the road.
Wrapping Up
If you’re a business that offers your customers the ability to pay by check (or if you occasionally pay your partners via checks), it’s good to stay up-to-date on avoiding returned check fees and educate yourself or your customers. By doing so, you can ensure a healthy financial relationship between all parties in the long run.
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