What Is a Bank of First Deposit (BOFD)?

A bank of first deposit (BOFD) is a bank at which an individual first deposits a check into his or her account. If the issuer of the check likewise banks at the very same financial institution, clearing the check is known as an "on-us" item. If the check was drawn from another institution, the bank receiving the check would classify this transaction as a "transit" item.

Key Takeaways

  • The bank of first deposit (BOFD) is a term signifying the banks where customers first deposit checks into their accounts. 
  • If a customer deposits a check at the same bank where the issuer conducts business, this activity is called an "on-us" item.
  • When a customer deposits a check at an institution that differs from that used by the check issuer, the check must be cleared through a private clearinghouse or some other third-party entity. 

Understanding Banks of First Deposit (BOFD)

When a depositor draws a check from the same institution that wrote the check, this transaction is called an “on-us” item, where the depositor can immediately cash the check or deposit it into any account he holds at that particular bank. Furthermore, on-us items can manifest in the form of electronic debits or transfers.

To illustrate the significance of BOFDs, one need only consider a paycheck. Let us assume that an individual deposits his or her paycheck into his retail bank, which is named Bank A, and that his employer likewise transacts with Bank A. In this scenario, the money essentially moves from one account to another, all under the same roof, which makes for a swifter clearing process.

Contrarily, if a worker conducts his business at Bank A, but his employer operates through Bank B, the check consequently must clear through a private clearinghouse or another outside institution. This invariably delays the process for a check to clear, therefore, an individual must wait longer to access or clear the deposit on his hard-earned cash.

Naturally, for the first scenario to work, the employer's account, which is referred to as the "drawing account," must contain a sufficient balance to cover the paycheck cut to an employee. Generally speaking, on-us items benefit banks, who typically earn revenue from both the acquiring and issuing parties, with these transactions.

In a lesser-used context, a bank of first deposit (BOFD) also signals an institution to which a check would be returned if the check is not paid.

BOFD and the Federal Reserve System

The U.S. Federal Reserve System was instituted in the aftermath of the financial panic of 1907. At this time in U.S. history, many banks were failing to clear checks drawn at other banks. A lack of dependable credit stunted growth in many sectors, although the agriculture industry was hit particularly hard.

All of this activity triggered widespread panic that liquidity issues within the banking and trust industries could leave American consumers strapped for cash. This fear of bank insolvency led to a flood of bank runs, where masses of bank customers simultaneously withdraw their deposits. In response, the Federal Reserve developed the bank of first deposit ideal.

In the 1940s, the introduction of routing numbers to the bottoms of checks helped banks of first deposit facilitate a growing volume of transactions. This nine-digit numerical code identifies the banks and other financial institutions that process checks. Specifically, the first four digits of any routing code designate the Federal Reserve Bank located in the district where the BOFD is located. The next four digits denote the specific financial institution. Finally, the last digit classifies the check.