Cheque Bank

Cheque clearing (or check clearing in American English) or bank clearance is the process of moving cash (or its equivalent) from the bank on which a cheque is drawn to the bank in which it was deposited, usually accompanied by the movement of the cheque to the paying bank, either in the traditional physical paper form or digitally under a cheque truncation system. This process is called the clearing cycle and normally results in a credit to the account at the bank of deposit, and an equivalent debit to the account at the bank on which it was drawn, with a corresponding adjustment of accounts of the banks themselves. If there are not enough funds in the account when the cheque arrived at the issuing bank, the cheque would be returned as a dishonoured cheque marked as non-sufficient funds.^[1]

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History[edit]

England[edit]

Cheque Bank

Cheques came into use in England in the 1600s. The person to whom the cheque was drawn (the 'payee') could go to the drawer's bank ('the issuing bank') and present the cheque and receive payment. Before payment, the drawer's bank would check that the cheque was in order – e.g., that the signature was that of the drawer, that the date was valid, that the cheque was properly set out, etc. Alternatively, the payee could deposit the cheque with their own bank who would arrange for it to be presented to the issuing bank for payment.

Until around 1770 an informal exchange of cheques took place between London banks. Clerks of each bank visited all of the other banks to exchange cheques, whilst keeping a tally of balances between them until they settled with each other. Daily cheque clearings began around 1770 when the bank clerks met at the Six Bells, a tavern in Dove Court off Lombard Street in the City of London, to exchange all their cheques in one place and settle the balances in cash.^[2]The first organization for clearing cheques was the Bankers' Clearing House, established in London in the early 19th century. It was founded by Lubbock's Bank on Lombard Street in a single room where clerks for London banks met each day to exchange cheques and settle accounts. In 1832 Charles Babbage, who was a friend of a founder of the Clearing House, published a book on mass production, The Economy of Machinery and Manufactures, in which Babbage described how the Clearing House operated:^[3]

'In a large room in Lombard Street, about 30 clerks from the several London bankers take their stations, in alphabetical order, at desks placed round the room; each having a small open box by his side, and the name of the firm to which he belongs in large characters on the wall above his head. From time to time other clerks from every [banking] house enter the room, and passing along, drop into the box the cheques due by that firm to the house from which this distributor is sent.'

Beginning at 5 pm, a clerk for each debtor bank was called to go to a rostrum to pay in cash to the Inspector of the Clearing House the amount their bank owed to other banks on that day. After all of the debtor clerks had paid the Inspector, each clerk for the banks that were owed money went to the rostrum to collect the money owed to their bank. The total cash paid by the debtor banks equaled the total cash collected by the creditor banks. On the rare occasions when the total paid did not equal the total collected, other clerks working for the Inspector would examine the paper trail of documents so that the numerical errors could be found and corrected.^[4]

Jumping forward several centuries, the Cheque and Credit Clearing Company is the United Kingdom's clearing house.

United States[edit]

The Suffolk Bank opened the first clearing house in 1818 in Boston, and one was incorporated in New York in 1850.^[5] A clearing house for bankers was opened in Philadelphia in 1858.^[6]

The Americans improved on the British check clearing system and opened a bankers' clearing house, the Clearing House Association, in the Bank of New York on Wall Street, New York in 1853. Instead of the slow London procedure in which each bank clerk, one at a time, stepped up to an Inspector's rostrum, in the New York procedure two bank clerks from each bank all worked simultaneously. One clerk from each bank sat inside a 70 foot long oval table, while the second clerk from each bank stood outside the table facing the other clerk from the same bank.^[7] Each of the outside clerks carried a file box. When the manager signaled, all of the outside clerks stepped one position to the left, to face the next seated clerks. If a seated clerk represented a bank to which money was owed or from which money was receivable, the net amount of cash would change hands, along with checks and paper documents.

Thus several such transactions could be conducted simultaneously, across the oval table. When the manager signaled again, this procedure was repeated, so that after about six minutes, the clerks had completed all their assigned transactions and were back to their starting locations, and holding exactly the amount of cash their papers said they should be holding. Clerks were fined if they made errors and the amount of the fine increased rapidly as time passed.^[7][8]

The Federal Reserve System check clearing system was established in the United States in 1913 to act as a central, well-capitalized clearing house. The objective was to prevent the occasional panics, where banks would refuse to accept cheques drawn on banks whose solvency was uncertain. The Federal Reserve can physically accept and transport cheques.^[9]

Operation[edit]

When a bank customer deposits a cheque, which may be drawn on any bank, the bank would credit the depositor's account with the amount of the cheque. However, the amount so credited is “not available” to the depositor until the cheque has been cleared by the paying bank.

For cheques drawn on a customer of the same bank, the bank would, usually on the next business day, ensure that the cheque is in order and debit the account of the drawer, and the cheque would be taken to have been cleared. A cheque is not in order if, for example, the date is invalid, the drawer's signature is not like the one held by the bank, the wrong number of signatories have signed the cheque, etc. There must also be sufficient cleared funds in the account before the drawer's account is debited.

Cheques drawn on another bank (termed 'the issuing bank' or “paying bank”) need to be 'presented' to the other bank before the deposit bank receives payment to cover the amount credited to the depositor's account. In the absence of the paying bank notifying the deposit bank of the “special clearance” of the cheque, for example, following a request from the deposit bank, the funds become available after the passing of an agreed “clearance period”, commonly three business days, when the depositor's account is described as comprising “cleared funds”.

If the cheque is not in order, or if there are not enough cleared funds in the account when the cheque arrived at the issuing bank, the cheque would be returned as a dishonoured cheque marked appropriately, such as “non-sufficient funds” or “present again”.^[1]

All banks might have clerks to take cheques drawn on other banks to those banks, and wait for payment. Clearing houses were set up to streamline the process by collected all cheques drawn on other banks, and collecting payment from those banks for the total to be cleared.

Automation[edit]

Cheque processing[edit]

As volume grew, more efficient sorting methods were developed. Approaching the 1940s, two popular methods were Sort-A-Matic and Top Tab Key. Sort-A-Matic involved a set of metal or leather dividers numbered 00 through 99, operated to implement a form of radix sort: cheques would be sorted by hand according to the first two digits. The cheques would be removed, and each stack sorted into the same dividers by the third and fourth digits. The process was iterated until the cheques were completely sorted. Top Tab Key used a physical mechanism: holes were punched in the top of each cheque representing the values of various digits, and metal keys used to physically move them until sorted.

Magnetic ink character recognition (MICR) was developed and commercialized in the 1950s, and enabled computers to reliably read routing and account numbers and automated the sorting of paper cheques.

Electronic clearance[edit]

Cheque truncation was introduced in various countries, starting in the 1990s, to allow electronic images to be made of physical cheques, for electronic clearance.

The legalisation of remote deposit made it possible for businesses and bank customers to deposit cheques without delivering them to their own banks. In the process, a depositor would make an image of the physical cheque with a smartphone or other device, and attach the image to a deposit. The deposit bank would use the cheque image in the normal electronic clearance process, though in this case MICR data would not be available.

Electronic payments[edit]

As the automation of cheque processing improved, fully electronic payment systems obviated the need for paper. Two methods were developed: the Automated Clearing House (ACH) for smaller payments which complete in two business days, and Clearing House Interbank Payments System (CHIPS) for larger value same day payments.

'In 1974, ACH Associations from California, Georgia, New England and the Upper Midwest region formed NACHA within the American Bankers Association. Following that, the initial ACH rules were approved, which made Prearranged Payment and Deposit or Direct Deposit, the first ACH transaction type, effective. By 1978, it was possible for two financial institutions located anywhere in the U.S. to exchange ACH payments under a common set of rules and procedures.'^[10]

'The automated clearinghouse (ACH) system is a nationwide network through which depository institutions send each other batches of electronic credit and debit transfers. The direct deposit of payroll, social security benefits, and tax refunds are typical examples of ACH credit transfers. The direct debiting of mortgages and utility bills are typical examples of ACH debit transfers. While the ACH network was originally used to process mostly recurring payments, the network is today being used extensively to process one-time debit transfers, such as converted check payments and payments made over the telephone and Internet.'^[11]

'CHIPS is the largest private-sector U.S.-dollar funds-transfer system in the world, clearing and settling an average of $1.5 trillion in cross-border and domestic payments daily. It combines best of two types of payments systems: the liquidity efficiency of a netting system and the intraday finality of a RTGS.'^[12] Organized in 1970 by eight New York banks who were members of the Federal Reserve system, CHIPS competes with the Federal Reserve for high value payments. Until 2001, CHIPS settled at the end of the day, but now provides intraday payment finality through a real-time system.^[13]

See also[edit]

• CHAPS - the UK equivalent of CHIPS
• Electronic funds transfer (EFT)
• The Electronic Check Council (ECC)
• NACHA - the US national ACH network

References[edit]

1. ^ ^ab'what is check clearing? - definition'. Business Directory. Retrieved August 21, 2014.
2. ^Nevin and Davis, The London Clearing Banks, (1970) pp.40-41
3. ^Campbell-Kelly, page 20
4. ^Matthews, Philip W (1921). Bankers' clearing house: what it is and what it does. Banker's Library. Pitman.
5. ^U.S. House of Representatives Banking and Currency Reform Hearings of the Subcommittee of the Committee on Banking and Currency, January 7, 1913, Part 1, Statements of A. Barton Hepburn, Victor Morawetz and Paul M. Warburg (1913) Washington, D.C.: Government Printing Office, p.388
6. ^Blanchard, C. (Ed.) The Progressive Men of the Commonwealth of Pennsylvania (Vol. 2) (1900) Logansport, Indiana: A.W. Bowen & Co., p. 873
7. ^ ^abCampbell-Kelly, page 21
8. ^Campbell-Kelly, Martin (October 2010). 'Victorian Data Processing'. Communications of the ACM. 53 (10): 19–21. doi:10.1145/1831407.1831417.
9. ^'Check Services Offerings'. Archived from the original on 2013-03-25. Retrieved 2013-03-27.
10. ^'The Evollution of a Strong ACH Network'. NACHA. Retrieved 5 April 2017.
11. ^'Automated Clearing House Services'. The Federal Reserve. Retrieved 5 April 2017.
12. ^'CHIPS'. The Clearing House Association. Archived from the original on 2017-03-20. Retrieved 5 April 2017.
13. ^'CHIPS'. Federal Reserve Bank of New York. Retrieved 5 April 2017.

From: Financial Consumer Agency of Canada

Access to the first $100

Financial institutions must make the first $100 of all funds you deposit by a cheque available to you right away. If the cheque is for $100 or less, the financial institution must make the entire amount of the cheque available to you.

The first $100 must be available to you:

• immediately if you deposit the cheque in person with a teller, or bank employee, at one of the financial institution's branches or other locations where you can open an account
• on the business day after the day of the deposit if you deposit the cheque in any other way, such as at an automated teller machine (ATM), using a mobile device

Exceptions for access to the first $100 for small and medium-sized businesses

Access to the first $100 deposited by cheque does not apply to cheques deposited by eligible enterprises, such as small and medium-sized businesses.

An “eligible enterprise” means a business with:

• authorized credit of less than $1 million
• annual revenues of less than $50 million
• fewer than 500 employees

Holds on cheques

When you deposit a cheque at a financial institution you may have to wait a certain amount of time to access the money. This is called a hold on a cheque.

A financial institution may hold money you deposit by cheque to:

• make sure that the person or company who wrote the cheque has enough money to cover it
• make sure that the person or company who wrote the cheque has not put a stop payment on it
• check the details with the cheque writer to make sure that it has not been altered
• make sure that the account on which the cheque was written is still open and has not been closed

Instead of using cheques, consider having deposits made to your account electronically. This may let you access the funds you deposit right away.

Maximum cheque hold period

There is a limit to the amount of time a federally regulated financial institution, such as a bank, can place a hold on money you deposit by cheque.

Federally regulated financial institutions can hold the money you deposit by cheque for 4 to 8 days. The amount of time depends on the amount of the cheque and how it was deposited.

These limits apply as long as the cheque is:

• in Canadian dollars
• drawn on an account from a financial institution’s branch within Canada
• paper-based, which includes cheques deposited using a mobile device
• encoded with magnetic ink used for the line of special numeric characters across the bottom of the cheque
• not damaged and a processing machine is able to read it

If you have an account at a provincially or territorially regulated financial institution, such as a credit union or caisse populaire, ask about its policy on holding funds deposited by cheque.

In some cases your financial institution may release the money to you before the cheque clears. If the financial institution does this, it's actually extending credit to you.

This means that if the cheque does not go through, you may need to pay back the amount of the cheque that was deposited to your account. If you don’t have enough money to cover the amount of the cheque then you might go into overdraft. This could cost you more money.

Maximum hold period for cheques drawn on banks outside of Canada

If the cheque writer or cheque writer's financial institution is located outside Canada, the cheque can take much longer to clear.

Financial institutions often hold foreign cheques for 30 days. If the cheque does not clear, your financial institution will withdraw the money from your account.

Your financial institution may choose to return the cheque to the bank that issued it and have it replaced by a secured method of payment, such as a bank draft or a cashier's cheque. It would then need to wait for that institution to send the bank draft or cashier's cheque.

Exceptions to the maximum cheque hold periods

The maximum cheque hold periods may not apply to:

• an account that has been open for less than 90 days
• a cheque that has been endorsed more than once
• a cheque that is deposited six months or more after it was dated
• a cheque that isn't issued in Canadian dollars
• a cheque issued from an account at a bank branch outside of Canada
• a deposit that a financial institution has reasonable grounds to suspect is being made for illegal or fraudulent reasons
• a cheque that isn't encoded with magnetic ink to allow character recognition
• a cheque that is damaged

Exceptions to the maximum cheque hold periods for small and medium-sized businesses

Small and medium-sized businesses and other eligible enterprises have the same exceptions to maximum cheque hold periods as those outlined above.

In addition, maximum cheque hold periods may not apply to these businesses if they have:

• a negative change in their credit score
• an increase in their overdraft balance that isn't being reduced by deposits received
• an unexplained change in the history of cheques being deposited to the account
• high numbers of cheques returned due to dishonoured cheques
• a notice of bankruptcy or creditor action against the business

Counter-signed cheques

A cheque can be cashed by someone other than the person named on the front of the cheque if they counter-sign it.

Check with your financial institution to find out if they accept counter-signed cheques. Not all financial institutions accept them.

Dishonoured cheques

A dishonoured cheque is when the cheque doesn't go through and can’t be paid.

Reasons for a dishonoured cheque may include:

• non-sufficient funds (NSF) in the cheque writer’s account
• irregular signature, that is, if the signature the cheque writer signs on the cheque differs from the sample signature in the financial institution
• a difference between the amount written in words and the one in numbers

Information you must receive about cheque hold periods

A federally regulated financial institution, such as a bank, must give you a written copy of its policy on cheque holds when you open an account. You can find the policy as part of your account agreement or as a separate document.

The cheque hold policy tells you how long the financial institution can hold the cheques that you deposit.

It must include information about:

• the maximum length of time it may hold funds for a cheque that is drawn on an account at a financial institution in Canada
• the maximum amount of time it may hold the funds you deposit from a cheque that isn't subject to the legislated maximum cheque hold periods

If the policy does not specify if a hold applies to your account(s), your financial institution decides when you deposit your cheque.

Changes to your financial institution's cheque hold policy

Your financial institution may change its policy on holding funds deposited by cheque. It must let you know what these changes are before applying them to your account.

If you get a regular statement in the mail, your financial institution must send you (or the person you choose to receive this information) a written notice explaining any change in its policy on holding funds deposited by cheque. It must do so at least 30 days before applying the change to your account.

Cheque Bank And Transit Number

If you carry a passbook that you present to the financial institution when you make a transaction, your financial institution must display, in your branch, a notice explaining the change in its policy. It must do so for at least 60 days before applying this change to your account.

Making a complaint about your financial institution

Cheque Bank Information

If the financial institution refuses to honour the maximum cheque hold periods, or doesn’t allow you to withdraw the first $100, it must give you a refusal letter. If you don’t receive the letter, ask for it. The letter must tell you how to contact the Financial Consumer Agency of Canada (FCAC) if you wish to file a complaint.

Cheque Bank Code

If you have a concern about a hold, discuss it with your financial institution.

Cheque Bank Routing Number

Related links

• Depositing a cheque with your mobile device
  

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