The main clearing banks provide special services for:
- Organisations receiving very large numbers of payments (e.g. utility companies, retailers, local government etc.)
- Small banks and building societies who do not want the hassle of running their own clearing and payments operations.
The former use a service called a Collection Account, sometimes called a Head Office Collection Account or HOCA. The latter use a service called Agency Bank Service. They are described in turn below, although they have some features in common and they form an important part of the Reconciliation Services banks offer.
Let us take the example of a Local Authority who has to receive community charge from 100,000 houses in its area. There are only a few bands so the monthly charge may well be the same for 20,000 of the homes. The local authority does not want to open 100,000 letter a month, each containing a cheque. It would prefer
- the majority of such payments to be made electronically by direct debit.
- failing that, as customer initiated electronic payment by electronic transfer on the internet or the bank’s call centre.
- failing that, the customer presenting a cheque and credit slip into a bank branch.
The result of all these methods of payment is the money ending up in the local authority’s bank account without the authority having to do any work, which is good from the local authority’s point of view. The problem it now has is to work out which payment corresponds to which home owner. Some 20,000 homeowners all pay the same monthly charge, so the amount is no clue as to who has paid and there is no accompanying customer letter or other clue as to who the payment is from.
What the banks do to help the local authority is to ensure the local authority’s customer reference number is incorporated into the transaction detail. Quite how this is done varies by payment method.
- Direct Debit instructions are created by the local authority and so incorporate their customer reference through their direct debit origination software.
- Internet transfers make sure the customer reference is incorporated by the internet banking screens forcing the payee to type the reference number in (often creating a payment mandate/template prior to making the payment).
- The credit slips to accompany cheques have the customer reference in the MICR code line instead of the local authority’s account number.
The banks supply these payments to the local authority in electronic form so that they can be automatically matched in the local authority’s accounts receivable computer system, thus saving the local authority work and cost.
A similar approach applies to small banks and building societies who do not want the cost and hassle of participating in the interbank payments systems. They use a Clearing Bank to provide a “bucket” account into which (and out of which) payments (both electronic and cheque) can be made. The clearing bank provides all the interfaces into the interbank payment systems (e.g. CHAPS, BACS, Cheque Clearing) and all the entries go into the “bucket” account dedicated to the Agency Bank. This time the clearing bank includes an account number that makes sense in the Agency bank in the transaction narrative. The small bank uses these transaction narratives to allocate payments to their customers’ accounts in their own customer accounting systems.
The main difference from a systems point of view between Collection Accounts and Agency Banks is that the latter involves credit and debit payments where the former is only about collecting credit payments.