The article on the Current UK Cheque Clearing Process shows how lengthy a process it is getting a cheque cleared at the clearing banks, this article aims to highlight how much longer it takes for agency banks to carry out the same process. To help explain this the article has been broken down into several parts:
- Cheque Clearing Where the Cheque does not Bounce
- Agency Bank Cheque Processing of Bounced Cheques
This article describes the cheque clearing process for banks other than the Clearing Banks in the UK, commonly called Agency Banks in UK banking jargon. These include building societies, small UK domestic banks and UK subsidiaries of foreign banks. What they all have in common is that they do not want the cost and hassle of establishing and maintaining a cheque clearing operation so they outsource much of the cheque processing to one of the Clearing Banks. This article builds on (and assumes a knowledge of) the description of the cheque clearing process for Clearing Banks.
Cheque Clearing Where the Cheque does not Bounce
The diagram below illustrates the process where a person (called Heroine) pays in a cheque at her bank, an Agency Bank, (a small building society) drawn on another Agency Bank (for example a UK subsidiary of a US bank). The different parts of the process are described in turn. Later on in the article we discover what happens when the cheque Heroine has paid in bounces.
Heroine pays in her cheque and credit slip into her bank branch (Branch X). To all intents and purposes, at this stage, her bank is just a post box. They collect the cheque and credit slip and then send them on to their Clearing Bank (Bank A) here.
The way this is done varies from Agency Bank to Agency Bank. Some highly centralised organisations (e.g. a Credit Card bank which only has a mail/call centre, will put all the day’s cheques into a van and rush them to Bank A late on the night of day T.
Other banks with branch networks will post them via the GPO to their Clearing Bank meaning they do not get to Bank A until day T+1. Others will be somewhere in the middle, maybe using internal mail to get all the cheques and credit slips for the whole branch network to a head office location and then putting them all in a van to Bank A, but still not in time to be processed as part of Day T.
Clearing Bank A processes the cheque for the Agency Bank in much the same way as it does for its own (see UK cheque clearing for more detail). To make this work, just like any other customer of Bank A, the Agency Bank X has an account with Clearing Bank A, often called a settlement account. Clearing Bank A credits this account with all the cheque credits it has processed in out-clearing as part of the accounting on the night of T+2. Bank X then withdraws this money to use to pay its customers’ accounts.
To help the Agency Bank work out which account to credit Bank A’s out-clearing process for Agency Banks will typically provide an electronic file of credit records (derived from the codeline on Bank X credit slips) to be made to Bank X’s accounts (remember, at this stage Bank X may have no record, neither electronic nor paper, of the cheque payment).
Clearing Bank A may send this electronic detail as part of the output from Out-clearing on T+1 or in the form of an electronic statement of the account that the Agency Bank holds with Bank A after the accounting runs on the night of T+2.
Bank X uses the electronic file of information as input to its own customer accounting processes, normally on the night of T+2 or T+3. In the case of Heroine, she has now received the credit for the cheque she paid in some two or three days ago.
As with Clearing Banks, Bank X has to decide when to give Heroine the benefit of this credit, for both interest accrual purposes and for withdrawal. As a general rule, most Agency Banks are cautious about offering the ability to withdraw the money for quite a few days because of the time taken to find out whether the cheque will bounce (see below).
The cheque is drawn against Agency Bank Y who uses Clearing Bank B to do its cheque clearing.
Clearing Bank A sends the cheques and electronic IBDE information for the cheques drawn on Bank Y to Clearing Bank B via the same mechanisms that it uses to move cheques drawn on Clearing Bank B (see UK cheque Clearing for more detail). This is achieved by Bank Y having a sort code that is unique to it, that is associated with Bank B and is known by all the cheque clearers to be associated with Clearing Bank B. (The allocation of sort codes is available publicly via the ISCD – International Sort Code directory).
During In Clearing, Clearing Bank B, recognises that all cheques with Bank Y’s sort code have to be treated differently to those of its own customer accounts. It sorts out Bank Y’s cheques into a separate pile for onward delivery to Bank Y. For some of its Agency Banks, Bank B creates an electronic file of debits, with the Agency Bank’s customer reference as part of in-clearing on T+2. For other customers, it is produced in the form of an electronic statement during T+3.
Either way Bank Y can apply the cheque debits to its accounts on the night of T+3 and make its pay/no pay decisions on T+4. If the account has funds and there are no fraud issues the cheque clearing cycle for the Agency Bank ends here. Unfortunately for Heroine, Bank X decides there is not enough funds in the account to honour the cheque so they decide to return it.
Agency Bank Cheque Processing of Bounced Cheques
The diagram below illustrates how a cheque is returned if Agency Banks are involved.
D) Bank Y Unpaids
Bank Y has no knowledge of which bank the cheque was paid into so all it can do is sort it out from the other cheques and return it to its Clearing Bank, Bank B. This is normally sent by post.
E) Bank B Unpaids Out
Bank B also has no knowledge of which bank the cheque was paid into, all it can do is find in its records that it came from Clearing Bank A, via its daily Unpaids Out process on T+5. It then sends the cheque along with the rest of the cheques to be returned back to Clearing Bank A via the process described in UK Cheque Clearing.
F) Bank A Unpaids In
Bank A’s “Unpaids In” process will run on T+6. During this process it will recognise that the cheque is associated with a credit that has Bank X’s unique sort code. (All Agency Banks have a unique sort code). Furthermore, the electronic credit code-line read during Out-clearing, many days ago, will include a customer reference that is meaningful to Bank X, for example a building society roll number.
Clearing Bank A will retrieve the paper credit slip associated with Heroine’s cheque and send both the slip and cheque back to the Agency Bank, normally via post. They may use the electronic information to send a fax or make a phone call to Bank X to gain a day’s time.
G) Bank A’s Unpaids Process
When Bank A finds out that the cheque has bounced, probably on day T+7 they will process some accounting entries, usually overnight on T+7 to reverse the credit it has given Heroine a few days ago for the cheque.
Overall this case might be considered a bit extreme in that the cheque was paid into an Agency Bank and drawn on an Agency Bank whereas, most Agency Bank cheque transactions will only involve only one Agency Bank and two Clearing Banks.
However, many of the steps in the process involve post office delivery of mail next day. This is not a guaranteed service. Furthermore, many of the steps involve manual intervention, manual checking and manual handling. Cheques do get mislaid and misread. The bottom line is that because of the lengths of time it can take for an Agency Bank to feel confident a cheque deposited with it will not get bounced, they often do not give credit for value (withdrawal) until T+5, T+6 or even later.