The cheque clearing cycle

Our Animated Guide to the Cheque Clearing Process helps explain the different stages involved in clearing a cheque. It is a two-minute film showing how, when and why cheques are moved around the country as part of the clearing process - and what happens if a cheque ‘bounces’.

The film also covers information on when a cheque earns interest, when cheque funds can be withdrawn and when funds from a cheque can no longer be reclaimed by your bank. An industry-wide agreement, known as 2-4-6, was introduced in November 2007 which sets maximum timescales for each of these stages.

Cheque clearing can be likened to an efficient factory process. During the day and night shift staff work around the clock to ensure that the three-and-a-half million cheques that are paid in every day keep to the 2-4-6 timescales, wherever in the UK the cheque is paid in.

The way in which the cheque clearing process works in Great Britain is explained here.  The Northern Ireland banks do not participate in exchange of electronic data but they achieve the same outcome and operate to the same timeframes as the banks in Great Britain:

Day 0: Monday morning

On Monday morning, Shelley gives Bob a cheque for £20. Bob immediately pays it into his bank.

Monday is day zero in the 2-4-6 timeline for clearing Bob’s cheque.  Cheques are generally paid in by the beneficiary customer to a current or basic bank account or a savings account at the beneficiary’s bank (known as the collecting bank).  They can also be paid in at a cash machine at some banks, a post office or sent by post.  Different methods affect when the bank receives the cheque and how quickly the processing starts. 

Day 0: Monday evening

On Monday evening, Bob’s bank sends his cheque to its clearing centre.

All cheques paid-in at the various collecting member banks are taken to their cheque clearing centres at the end of every clearing day to be processed ready for exchange with the other member banks. 

Day 1: early hours of Tuesday morning

In the early hours of Tuesday morning, Bob’s cheque is processed at the clearing centre.  Its details are sent to Shelley’s bank across a secure network.

During the out-clearing process at the clearing centres, the cheques are passed through reader/sorter machines that automatically read the amount of the cheque and the code line, containing the customer’s account number, branch sort code and cheque serial number at the bottom of the cheque. This data is converted into encrypted digital files. The encrypted digital files are known as IBDE (Inter-Bank Data Exchange) files. 

All the cheques are then sorted by their sorting codes (unique, six-digit numbers that are used to identify each bank or building society), ready for sending to one of the exchange centres (there is one in England and one in Scotland).

The IBDE files are transferred across the IBDE network provided by the C&CCC.  Every encrypted IBDE file is signed with a digital signature so that the receiving bank (the paying bank) can check that the data has not been tampered with by fraudsters.  Only the member banks have access to the secure network.

Day 1: late Tuesday morning

Late on Tuesday morning, Bob’s bank delivers his cheque to the exchange centre, where his cheque is passed on to Shelley’s bank.

The cheques are delivered by the collecting bank to one of the exchange centres before 11am, where they are passed to the paying bank, which takes them back to their own clearing centres for the process known as in-clearing.

Day 1: Tuesday afternoon

At the paying bank’s clearing centre, the paying bank starts the in-clearing process.  First of all it checks the digital signature to make sure that the IBDE files have not been tampered with by a fraudster, and then it passes the cheques through reader/sorter machines to match them up with the data on the IBDE file and to separate them into branch order.

The bank needs to be sure that all the cheques it has brought back from the exchange centres belong to it, as it will have to settle for them the following day (Wednesday).

Day 2: Wednesday morning

On Wednesday morning, the settlement process takes place. Shelley and Bob’s banks settle with each other for the value of the cheque they’ve exchanged the previous day, along with all the other cheques they have exchanged with all the other banks the day before. This happens before they have had time to examine the individual cheques to make their pay or no pay decision.  The Cheque and Credit Clearing Company calculates how much the GB banks owe each other and settlement takes place across accounts held at the Bank of England. In Northern Ireland each pair of four clearing banks agrees bi-laterally the net sum due to or from each bank and a CHAPS payment is sent to settle the amount owed.

Later on that morning, Shelley’s bank checks to see if she’s got enough money in her account to pay the cheque, also that it has been signed, dated, written correctly and is genuine. Based on this information, the bank decides whether to pay Shelley’s cheque to Bob or to return it unpaid to Bob’s bank.

If the cheque is paid:

Day 2: Wednesday afternoon

If the cheque is paid, Bob will start to receive interest on the money* and the deducted item will appear on Shelley’s statement. The vast majority (99.5%) of cheques are paid.

Day 4: Friday morning

On Friday Bob can draw money from the cheque**.  For current or basic bank accounts, day four is the day the beneficiary customer can withdraw the money from the cheque. If Bob had paid in the cheque into a savings account, he wouldn’t be able to withdraw the money until the end of day six.

* Individual banks may compete on when they will pay interest on the funds from the cheque paid-in; customers should refer to the terms and conditions of their account

** Individual banks may compete on when they will allow funds from the cheque paid-in to be withdrawn; customers should refer to the terms and conditions of their account

Day 6: Tuesday afternoon

At the end of the following Tuesday, Bob can be sure that the money from Shelley’s cheque won’t be reclaimed from his account without his consent – unless he’s a knowing party to fraud.

In this example the following Tuesday is day 6 of the 2-4-6 timeline as non-working days (Saturdays, Sundays and bank holidays) are not counted in the cheque clearing process.

The process if the cheque is not paid:

Day 2: Wednesday morning

On Wednesday, if Shelley’s bank decides not to pay the cheque to Bob, her bank will send the unpaid cheque back to Bob’s bank by special courier.

The unpaids process for cheques:

The decision to return a cheque unpaid must be made on the morning of the day after exchange so that the cheque can be returned straightaway to the bank which collected the cheque for advice to the beneficiary. Cheques may be returned unpaid for a number of reasons, such as:

• the customer has not got enough money in their account to pay the cheque
• if it has not been signed, dated, or written correctly
• it is fraudulent for some reason.

The paying bank writes to their customer to tell them that their cheque has been returned unpaid. The customer might be charged for the unpaid cheque.  Only 0.5% of all cheques are returned unpaid.

Day 3: Thursday morning

On Thursday morning, the unpaid cheque arrives back at Bob’s bank and is reclaimed from his account, so he can’t withdraw the funds on day four.

Depending on the reason the cheque is returned unpaid, the beneficiary/collecting bank will either try to get the cheque paid again, or they’ll send the cheque back to their customer and advise them that it has bounced.

Day 4: Friday

If the bank sends the unpaid cheque back to their customer, they can try to pay the cheque in again, or contact the payer and ask for another form of payment.