This article is an extension of the article (Post 2019 UK Cheque Clearing Process) which explains how cheque clearing works in the UK from the end of 2019. It expands description in the other article by exploring how small Banks and Building Societies participate in the cheque clearing scheme without being full members, and as a consequence, they have a slightly different process.
The article can be compared to the pre-2019 Agency Bank Cheque Clearing process (described here). In practice, both processes ran in parallel for a couple of years, starting in 2018, as the industry had a phased migration from the pre-2019 system to the post 2019 system. The article is broken down into three parts:
- Post 2019 Cheque Clearing for Agency Banks.
- Conclusion and areas not covered.
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 (click here for a description).
The diagram below illustrates the process where a person (called “Modern Day 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.
Post 2019 Agency Bank Cheque Clearing .
Heroine pays in her cheque and credit slip into her local Bank X branch. 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).
The way this is done varies from Agency Bank to Agency Bank. Some highly centralised organisations (e.g. a Credit Card or mobile 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.
Finally some Clearing Banks offer a software service to their Agency Bank customers whereby the Agency Bank can create images of the cheques (e.g. via a desktop scanner attached to the Corporate Electronic Banking App) and upload these images directly to the Clearing Bank systems.
We assume Agency Bank X sends physical cheques to Clearing Bank A to be processed on day T+1 in our diagram.
Clearing Bank A processes the cheque for the Agency Bank in much the same way as it does for cheques paid in by its own customers (see Post 2019 UK cheque clearing for more details).
This involves creating an image of the cheques and an associated electronic data record (amount, sort code, account number) of both the cheque and the credit slip of “Modern Day Heroine’s” cheque and credit slip.
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 with value for 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. In the case of “Modern Day Heroine”, she has now received the credit for the cheque she paid in some two days ago.
The cheque is drawn against Agency Bank Y who uses Clearing Bank B to do its cheque clearing.
The Image Clearing System infrastructure sends the Request to Pay images (which include cheque images and electronic cheque information) for the cheques drawn on Bank Y to Clearing Bank B via the same mechanisms that it uses to move the drawn on Clearing Bank B (see Post 2019 UK cheque Clearing for more detail). This is achieved by Bank Y having a sort code (present on the Bank Y cheques’ code line) that is unique to it, but is associated with Bank B and is known by the Central Infrastructure 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 (from the sort code) that the Request to Pay messages have to be treated differently to the Request to Pay messages for its own customers. It will either:
- Send the RTP messages (including the cheque images) to the Agency Bank of which the cheque is drawn on, or
- Make available on a portal (e.g. a Corporate Banking Electronic Banking Service) the list of Request to Pay messages for that day (T+2) along with their associated cheque images, or
- Do neither of the above, but rather the Agency Bank Y staff have to logon to the Central Infrastructure portal to view the outstanding Request to Pay messages for that day (T+2) and their associated cheque images. (Bank Y also has the option of its own systems being electronically connected to the Central Infrastructure and receiving the Request to Pay messages that way).
D) Pay/No Pay Processing
The Agency Bank Y has until 15:30 on the day they receive the Request to Pay message (T+2 in our example) to decide whether the cheque is paid. If they do not respond by that time, the Central Infrastructure/scheme defaults the cheque to paid.
The way the Agency Bank Y staff can respond varies. Options include:
- Submitting Pay/No Pay Response messages directly to the Central Infrastructure.
- Logging onto the Central Infrastructure and manually keying the Pay/No Pay Responses.
- Using a Clearing Bank B service to do these things.
However it is achieved, default or otherwise, the Central Infrastructure will send a Pay/No Pay Response to Clearing Bank A and generate relevant Inter (clearing) Bank Settlement between Clearing Bank A and Clearing Bank B.
E) Inter Bank Settlement
Assuming that Agency Bank Y honours the cheque, Clearing Bank B will want to see funds on the bank account Agency Bank Y holds with it sufficient to cover the cheque at the end of the day of processing the Request to Pay massage (T+2 in our case).
Likewise, Clearing Bank A must ensure it has credited the account Agency Bank X (Modern Day Heroine’s bank) account at Clearing Bank A with the cheque funds. Both Clearing Banks charge their Agency Bank customers for the Clearing Service, usually based on cheque volumes/values and so they will update their charging and internal accounting systems with this activity.
F) Payee Bank Request to Pay Response Handling
The Agency Bank X, the one that started the process, must deal with the Pay/No Pay response. To find out this response, it has a range of options:
- Obtaining a file of response messages in the form of a report from the Central Infrastructure.
- Logging onto the Central Infrastructure portal and manually checking the Pay/No Pay Responses.
- Using a Clearing Bank B service to do these things.
It will know this, at the latest by 15:30 on day T+2 in our example. If the decision is to Pay, then it will credit its customer with the value of the cheque, for value on T+2.
If it is a No Pay decision, it will need to execute its cheque returns processing which is likely to involve communications with its customer (“Modern Day Heroine” in this case) and some form of charging.
Conclusion and Areas not Covered
If this article is read in comparison with the article on Pre-2019 Agency Bank cheque clearing (click here) it can be seen that the process is much quicker than it used to be for Agency Banks.
The Agency Banks also now have more options in terms of technical connectivity. Before they were more or less tied to one Clearing Bank and it was very hard to move between Clearing Banks looking for a better/ cheaper service. The existence of Central Infrastructure with a range of direct connections facilitates different means of connectivity. This is important as many Agency Banks see cheques as a dying instrument and do not want to spend much money supporting them.
It’s worth noting that this article does not include Interbank Credit Processing.