In 2018 the UK developed a new way of handling cheques based on cheque image processing. This change has been called ICS (Image Clearing Systems) and previously FCM (Future Clearing Model). Whatever it is called, from end 2019 it will be the way cheques are cleared in the UK. It ran in parallel for some two years with the pre 2019 cheque processing model which is described here.
This article is broken down into three parts:
- Post 2019 Normal Cheque Clearing Process.
- Conclusion and areas not covered.
The core idea of the old model was that pieces of paper (the physical cheques) were moved around the country and from bank to bank. In the new model, the core idea is that electronic images of cheques move around, thus speeding up the whole process to become essentially a next day system.
The process is illustrated in the diagram below based on the example of a person called “Modern Day Hero” paying a cheque into their bank (Clearing Bank A) on day T but drawn on another bank, Clearing Bank B.
The key stages of the process are described in sequence.
Post 2019 Normal Cheque Clearing Process
The customer (Modern Day Hero in our case) presents the cheque to the Clearing Bank A. The traditional (and still common) way is for the customer to come to a branch of Clearing Bank A and hand over the cheque at the counter or into an automated deposit machine.
With the new system, banks are increasingly offering customers the option of using their mobile banking apps to take a secure image of the cheque and uploading it to the Clearing Banks systems directly. Either way there will be some cut-off time, say 17:00 pm, after which the cheque will be considered as presented on day T+1 rather than day T.
2. Out Clearing
The first step of the out clearing for Clearing Bank A is to create a secure image of the cheque. There are a number of ways of doing this.
- In branch cheque image capture devices (i.e. some device with a camera) at the counter.
- Image capture devices in the Automated Deposit Machine.
- Courier runs of cheques from branches to centralised cheque image scanning centre.
- Customer Mobile Banking Apps using smart phone cameras for personal customers.
- Corporate image scanning software for corporates paying in large volumes of cheques.
Different banks are developing different models depending on their customer base, cheque volumes etc.
Once the cheque image has been created, Clearing Bank A is responsible for image quality and fraud tests. Assuming these are passed, Clearing Bank A does two things on day T.
- It creates memo accounting entries for crediting customer account and debiting the interbank settlement account with value T+1. It uses information “read” from the cheque image (the monetary amount) and the code line to create these accounting values as well as creating a digital record of the target bank sort code and account number.
- It adds the cheque image and digital record to a file of cheque images and digital records to be sent to other banks.
3. Cheque Image Record Routing
Clearing Bank A sends (at the very latest by 24:00 on day T) the file of cheque images to a central facility run by Mastercard/Vocalink on behalf of the Cheque Clearing Company. This central infrastructure carries out the following functions at this stage;
- Breaks the files down into individual payment messages.
- Does some level of validation of the payment messages.
- Creates a central store of the image and payment information.
- Creates and sends a “Request to Pay” message for the bank that the cheque is to be drawn on (Clearing Bank B in the diagram above). This includes a copy of the image of the cheque as well s the encoded information (value, sort code, A/C no). The image is used by Clearing Bank B in Pay/No Pay decisions.
4. In Clearing
Clearing Bank B receives the stream of Request to Pay messages, one for each cheque drawn on it (including the one presented by “Modern Day Hero”.
Clearing Bank B has until 15:30 on day T+1 to reply to the Central Infrastructure with a Pay/No Pay decision for the cheque. If no decision is received by the Central Infrastructure by this, time the cheque is defaulted by Infrastructure to be paid.
The reasons why the cheque may be rejected are many; for example:
- Insufficient funds on the account.
- Customer deceased.
- Block on the account.
- Suspected fraud.
- Cheque not signed in accordance with mandate.
- Etc, etc.
In normal cirucumstances, if Clearing Bank B makes a No Pay decision, it will send a message to the Central Infrastructure including a reason code based on the reason why the cheque has been declined. If the Central Infrastructure makes a default decision then no such reason code can be provided to Clearing Bank A (and hence the customer).
If the cheque is agreed to be paid by the Clearing Bank B, the relevant customer and settlement account accounting entries are generated as are any charges by Clearing Bank B in its customer accounting systems.
If the cheque is declined, then there are still likely to be charges to be levied and fed into the customer accounting, even though the principle amount in the cheque is not.
5. Response Routing and Settlement
Once the Pay/No Pay response message has been received, the Central Infrastructure routes the Pay/No Pay response to the originating bank, Clearing Bank A in the diagram above. The Central Infrastructure also maintains running total of all the credits and debits for each bank by generating a pair of interbank settlement entries for each cheque processed. (The system is a multilateral net settlement system with one settlement cycle for each bank working day). Thus if a pay decision has been made by Clearing Bank B for “Modern Day Hero’s” cheque, a pair of interbank settlement entries (a credit to Clearing Bank A and a debit for Clearing Bank B) are created in Central Infrastructure records. If “Modern Day Hero’s” cheque bounces, then the No Pay message is sent to Clearing Bank A, but no settlement entries are made. All this happens as far as the Central Infrastructure is concerned by 15:30 on T+1. By 16:30 on T+1 interbank settlement across Bank of England Accounts is complete.
6. Originating Bank Response Processing.
The originating bank has to deal with the response from the Central Infrastructure. If the response is Pay, then the credit can be applied to the customer’s (“Modern Day Hero” in our case) account with value T+1.
If the response is No Pay, then Clearing Bank A has to start its returns process; which involves notifying the customer and can involve charges and/or returning the physical cheque.
Conclusion and Areas not Covered
The above paragraphs give a high level description of the UK cheque clearing process, and if read in comparison with the pre-2019 cheque process, it can be seen that the whole process is much quicker and involves much less manual handling. And so lost cheques/ damaged cheques are far less of a problem.
Despite this, the cheque is a dying instrument in the UK and forecast to fall down to very small volumes as electronic payments continue to evolve and improve in terms of ease of use. Aspects that have not been covered are:
- The credit clearing process (e.g. where someone pays a credit slip for Clearing Bank B in at Bank A). This is similar to the cheque clearing process but there are no pay/no pay decision messages to handle.
- The interbank settlement process of the Bank of England and associated interbank reconciliations.
- Most importantly this only describes the cheque clearing processing for the main clearing banks. There are 15 of these. However, there are 400+ banks in the UK that can pay or receive cheques who participate as “Agency Banks”. These banks outsource their cheque clearing operations to one of the Clearing Banks. To read a description of the Agency Bank Cheque Clearing Process click here.