DEFINITION of ‘Nonpar Item’
A check, draft or negotiable instrument that a paying bank honors at a discount when presented by another bank for collection. The discount is deducted from the check’s (or instrument’s) face value.
Nonpar banking, the practice of charging fees to execute a draft or check drawn from another bank, was commonplace in the U.S. until the Federal Reserve check collection system was created in 1916.
BREAKING DOWN ‘Nonpar Item’
State banking officials were the primary opponents to “par” banking as established by the Federal Reserve System because it would eliminate an important source of revenue – the fees collected to execute the exchange of financial instruments from non-local institutions.
Prior to the Federal Reserve check collection system, banks would charge significant fees to convert paper drafts into currency, typically to enable the draft holder to purchase land. Most land offices accepted only in specie payment for parcels. To avoid nonpar collection charges, banks would send checks to banks with whom they had a “par” relationship for payment, which often began a lengthy process of circuitous routing across the U.S. for final collection. Eliminating nonpar banking through the creation of an efficient collection and clearing system was one of the Federal Reserve System’s first goals.