The cheque clearing cycle

The way in which the clearing cycle works is explained below. This example is basedon a customer paying a UK sterling cheque issued by a UK bank in to their UK current account at their branch counter and the account is one where the 2-4-6 maximum timescales apply.

Day 0 - Paying in a cheque

In this example, Mr Smith (whose account is with the paying bank) has written a sterling cheque payable to Miss Jones who pays it in to her sterling current account at her branch (the collecting bank) on Monday. Her bank will apply the funds to her account and update their records that day (some banks apply funds and update their records later). So the money will show as an entry on her account, but in this example that does not mean that she will start earning interest or that she can withdraw the funds straightaway.

At the end of each working day (the central clearing system does not operate on Saturdays, Sundays and bank holidays) all the cheques that have been paid in to the various branches of a bank are sent to its clearing centre. So the cheque paid in by Miss Jones is sent to her bank's clearing centre, arriving late Monday night or early on Tuesday morning - or day 1.

At the clearing centres the cheques are sorted. The sort code, account number and serial number are captured from the codeline at the bottom of the cheque and these, together with the amount of the cheque, are sent electronically to the bank on which the cheque is drawn (the paying bank i.e. Mr Smith's bank) on Tuesday morning (day 1).

The physical cheque is then bundled up with all other cheques drawn on accounts at Mr Smith's bank and handed over to his bank (the paying bank) at one of the exchange centres in England or Scotland later on that morning. If the cheque was drawn on a bank in Northern Ireland it would be sent to Northern Ireland for local processing.

Day 2 - earning interest / reducing overdraft interest

At this point, on Wednesday morning, Miss Jones will have started to earn interest on the funds from the cheque she has deposited or, if her account is overdrawn, the balance on which overdraft interest is charged will be reduced. This part of the clearing cycle is sometimes referred to in banking as "clearing for value".

Also on Wednesday morning, two working days after the paying in day, Mr Smith's bank (the paying bank) debits his account with the amount of the cheque and this will show as an entry to his account on his statement and on his balance slip. From Mr Smith's perspective, the cheque has also been cleared for value, which means that funds paid by cheque stop earning credit interest or, if his account is overdrawn, increase the balance on which overdraft interest is charged.

However, it is still possible that the cheque may bounce due to insufficient funds in Mr Smith's account, if he has forgotten to sign the cheque (or there was some other technical reason), if Mr Smith were to put a stop on the cheque or the cheque turns out to be fraudulent.

It is very rare for a cheque to bounce, only about 0.5% of the cheques cleared each day are returned unpaid. If the cheque does bounce, Miss Jones' bank may reclaim the money from her account up until the end of day 6. If Mr Smith's bank still decides to bounce the cheque, it will return the unpaid cheque to Miss Jones' bank. This is normally done by courier.

As far as the central clearing process is concerned, on Wednesday morning the Cheque and Credit Clearing Company calculates the net amount the banks must pay to or receive from each other on the basis of the value of all the cheques exchanged on the previous day. The net sterling balances are then settled across accounts held at the Bank of England.

Day 4 - withdrawing money

By no later than Friday, four working days after paying in her cheque, Miss Jones' bank allows her to withdraw money against the funds deposited in the cheque from Mr Smith. This is sometimes referred to in banking as "clearing for withdrawal". If Miss Jones' account is a savings account withdrawal may not be allowed until day 6.

Day 6 - certainty

By the end of the following Tuesday (six working days after she has paid in the cheque) Miss Jones can be certain that the cheque funds have cleared, unless the money has already been debited from her account.

This means that providing she hasn't been a knowing party to a fraud, the money is hers to keep and it cannot be reclaimed without her consent. This final part of the clearing cycle is sometimes referred to in banking as "clearing for fate".