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The cheque clearing system

Find out what happens during the cheque clearing cycle and what the future may hold for cheque transactions.

Key points

  • It takes six days to have certainty of funds for money paid in by cheque
  • You may be able to earn interest and withdraw the money sooner, but you’ll have to repay if the cheque bounces
  • Cheque imaging is being introduced in 2016 and should speed up the cheque clearing process

Have you ever wondered why money paid by cheque isn’t usually available immediately in the recipient's current account?

It generally takes six days for funds paid by cheque to be confirmed and this period of time is known as the cheque clearing cycle.

During this time, your paper cheque does a surprising amount of travelling behind the scenes.

The cheque clearing cycle, day by day

There’s a clear timeline for what happens during the cheque clearing cycle.

Day zero

The process starts on day zero, when the cheque is paid into the recipient’s bank. It’s then sent to the bank’s clearing centre (usually in London) at the end of the working day.

Day one

The cheque is received at the clearing centre in the early hours and sorted. The account number, sort code, cheque number and payment amount on the cheque are sent electronically to the paying bank by 11am. Pound coins and a £5 note

The physical cheque is then batched up with others and handed over to the paying bank at central exchanges.

Day two

All banks calculate what they must pay each other based on the value of all the cheques exchanged the previous day and net balances are then settled across all accounts held at the Bank of England.

The paying bank debits the bank account of the person who wrote the cheque on the morning of day two.

If there are insufficient funds in the payer’s account, their bank will send the unpaid cheque back to the collecting bank by courier so it can advise the beneficiary – this is what happens when a cheque bounces.

Day three

If it bounced, the unpaid cheque arrives back at the collecting bank and, if the funds have already been credited, they’re reclaimed from the beneficiary’s account.

Depending on the circumstances, the beneficiary’s bank will either try to get the cheque paid again or will send it back to the beneficiary and advise them that it’s bounced.

The two-four-six timescale

Did you know...?

  • Cheque use fell from four billion cheques written in 1990 to 718 million in 2013

In November 2007, the two-four-six timescale was introduced to simplify the cheque clearing process for customers.

  • The day you pay your cheque in is called day zero
  • You start to earn interest on the cheque funds on the third day ('day two')
  • You can withdraw the money on the fourth day ('day three')
  • You can be sure the money is yours and the cheque won’t bounce on the sixth day ('day five')

Speeding cheques up with special presentation

If you want to find out urgently if a cheque you’ve received will be paid, you can ask your bank to present the cheque specially.

Your bank will then speed up the process by sending the cheque directly to the paying bank by first-class post and telephoning them the following working day to confirm whether it’ll be paid.

Due to the extra admin, there’s usually a charge for special presentation and not all banks offer it.

On 25 June, 2015, Gocompare.com checked 151 current accounts listed on the matrix of independent financial researcher Defaqto and found that 130 offered special presentation of cheques, but only 5% of these provided this service free of charge.

The special presentation charge was £10 for 41%, 28% charged between £12 and £15, and the remaining 26% charged between £20 and £25.

Also, although special presentation will give you certainty over whether your cheque will clear or not, you won’t receive the funds any sooner.

Individual bank policies

Although all banks follow the two-four-six rule on minimum timing guidelines, some have their own policies on when you can withdraw money or when cheque funds start earning interest. A piggy bank wearing a pair of sunglasses

For instance, some banks might allow you to withdraw money and will pay interest from the day the cheque’s paid in.

Of the 151 current accounts checked on Defaqto, just 6% gave a cheque clearing time of three days or less.

Although only 44 of the accounts checked paid in-credit interest, 41% of those that did paid interest from the day the cheque was paid in.

However, even if your bank does offer faster clearing or interest payment, if the cheque subsequently bounces you’ll have to repay the money, including the interest.

The future of cheques - cheque imaging

In 2009, it seemed that the days of the cheque were numbered when the banking industry set a target date of October 2018 for scrapping them.

Did you know...?

  • Cheques first appeared in pre-printed form in the 18th century
  • The first clearing house is thought to have been the Five Bells tavern in Lombard Street, London, where bank clerks would meet to settle cheque balances in cash

However, in 2011 the government intervened after an outcry from older people, small businesses and charities, and cheques were given a stay of execution.

Then, in October 2014, the Treasury announced the outcome of a consultation on legislating for cheque imaging.

Cheque imaging involves the banks sending a digital image of the cheque to the clearing centre rather than the physical cheque itself.

This should reduce both the time and cost of cheque processing by removing the need for courier transportation between branches, processors and exchanges.

Removing this step in the cheque clearing process should mean that recipients will have the cheque funds in their account sooner and the writer of the cheque will have their account debited more quickly, too.

The new legislation for cheque imaging comes into force on 31 July, 2016, and it’s thought that the certainty of funds time on a cheque will be reduced from six days to 48 hours or less.

Paying in cheques by smartphone

Another feature of cheque imaging is giving customers the ability to use a smartphone app to photograph their cheques and pay them.

In June 2014, Barclays was the first bank to trial this, followed by Lloyds in December 2014.

By Derri Dunn