Legal Definitions - collection

Collection in banking refers to the process through which an item, such as a check, passes in a payor bank. It involves the transfer of the item from the depositary bank to the payor bank, with the help of intermediary banks, until the payor bank pays the amount of the item.

For example, if John writes a check to Mary, Mary deposits the check in her bank, which becomes the depositary bank. The depositary bank sends the check to an intermediary bank, which sends it to John's bank, the payor bank. The payor bank pays the amount of the check to Mary's bank, which credits Mary's account.

Collection involves several types of banks, such as:

• Depository bank: the first bank to which an item is transferred for collection
• Intermediary bank: a bank to which an item is transferred in the course of collection, even though the bank is not the depositary or payor bank
• Payor bank: a bank that is asked to pay the amount of a negotiable instrument and is obliged to pay that amount
• Collecting bank: any bank handling an item for collection, except for the payor bank or the depository bank

Each bank in the collection process has a specific role and responsibility, and the process can take several days or weeks, depending on the distance between the banks and the amount of the item.