Major high street banks are known as clearing banks, for example, HSBC and
Barclays Bank in the UK. These clearing banks settle the amount of cheques drawn
on them and payable into their accounts through what is known as the clearing
system.
As an example, a bank clearing system, the UK operates in the following manner:
All cheques paid into, say, Lloyds Bank branches in a day are sent to Lloyds
head office. They are sorted into groups according to the bank that the cheques
are drawn on, for example all cheques drawn on HSBC Bank are grouped
together.
This process will take place in each of the clearing bank head offices clearing
departments.
The end result may be that for that particular day Lloyds requires $18m from
HSBC to cover the cheques paid into Lloyds branches that are drawn on HSBC
Bank accounts. HSBC in turn requires $24m from Lloyds for cheques paid into
HSBC branches drawn on Lloyds accounts. This is settled by Lloyds paying the
difference of $6m to HSBC through the accounts that each of the clearing banks
hold at the Bank of England, the central bank for the UK.
Each individual cheque is then sent to the branch on which it has been drawn. If
the cheque is valid and the account has sufficient funds then the account will be
debited with the amount of the cheque and the payee s account credited.
Cheques drawn on other banks or other financial institutions are dealt with in
the same system with one of the clearing banks acting as their agent.
Cheques do not leave the branch if both the drawer (account holder) and the
payee (person to whom the cheque is made out) have an account at that
branch. Cheques are dealt with at head offices if the drawer and payee have
accounts at different branches of the same bank.
Clearing systems may operate differently in countries outside the UK but the principles
will be similar. The geographical size of a country or accessibility from one city to
another may, for example, affect the speed of clearing receipts and payments.
The time taken to process the clearing of cheques has reduced in recent years. In
some cases, such as when the drawer and payee of the cheque have accounts at the
same branch of a bank, this may occur within one working day.
The paying bank may not necessarily pay all cheques. For example, if the cheque is
Incorrectly prepared or the drawer does not have sufficient funds in the bank account
then the drawer s bank will not pay on the cheque. The cheque will be dishonoured When a customer s cheque is dishonoured
this means that the goods or services
supplied have not yet been paid for. The business will seek an alternative form of payment from the customer.