Cheque clearance

Overview

Since 1999, banks have adopted a system to allow faster clearance of cheques.

By electronically transmitting some information about a cheque, the normal clearance time was brought down by at least two working days.

How does it work?

Before April 1999, processing had generally required five working days before a customer had access to cleared funds from a cheque.

Until the introduction of the new system, a cheque had to be physically transported to the paying bank before processing began. If it was dishonoured, it was physically returned.

Cheque particulars are now transmitted electronically so that processing can start before the cheque arrives at the paying bank. This speeds up the clearance process, giving customers faster access to their money.

So, if customers deposit a cheque on Monday, funds will normally be available on Thursday at the latest, instead of the following Monday.

Why hadn't this happened before?

It was only with the widespread use of computers that faster processing of cheques became feasible.

Cheques are a paper-based system of payment that existed long before electronic computers were invented.

The challenge was to develop a new system which balances the speed of electronic banking with the demands of customers to retain a paper trail. The project, involving banks and the Australian Payments Clearing Association, took some years to develop, and nine months to test and implement.

In an electronic age, why does it take three days?

While some data is being transmitted electronically, cheques as a payment instrument remain a paper-based system.

This means we still have the limitation of requiring the physical transportation of a document from one branch to another.

The electronic transmission of data enables banks to quickly ensure there are sufficient funds available, but a cheque could still be dishonoured if it:

                has been stopped by the payer;

                is forged;

                has been materially altered;

                is reported lost or stolen; or

                is subject to a court order restraining payment.

Have all cheque clearances been reduced by two working days?

The overwhelming majority of cheques are being cleared in the shorter period.

There will be instances however in which clearance could be delayed.

This could include examples where there is doubt over the bona fides of the cheque, where it has not been signed or where the computer identification codes on the cheque are damaged or missing.

There could also be some delays where a remote branch or agency is involved.

Does this mean interest will be earned sooner?

Customers can earn interest on the funds immediately, even if they cannot withdraw the funds.

When a cheque is deposited to an account, two things happen:

1.             Interest is immediately earned on the higher balance in the account to which the deposit has been made, even
        though the funds have not been cleared at that time.

2.             At the same time, the balance on the account on which the cheque has been drawn goes down, so less interest
        is earned.

Similarly if the cheque is deposited to a loan account, the customer immediately stops paying interest on that part of the debt.

What if I need faster clearance?

For a fee to cover extra costs, banks can offer faster clearance, but there will always be limitations with a paper-based system like cheques.

Electronic alternatives give customers faster access to their funds.

Most people are used to getting salaries paid electronically. This money can be withdrawn by the customer as soon as it goes into their account.

Electronic salary payments are part of the direct entry system that provides access to funds within 24 hours of the money being transferred to the bank.

Instead of sending or receiving cheques, businesses can use direct debit, direct credit or systems such as Bpay, which avoid cheques altogether.

Individual customers can avoid cheques by requesting funds be paid directly into their bank account. An example is to have tax refunds directly credited to personal accounts, instead of waiting for a tax cheque.

Cheque facts

               There are about 50 million cheques written each month[1].

               Cheques are being pushed aside - the value of daily cheque transactions has been cut by more than four-fifths 
       from $25 billion in 1994 to only $5 billion in 2004.

               As a proportion of all transactions, cheques are falling.

Until the mid-1970s, when credit cards started to gain popularity, most people used cheques or cash for their purchases or to pay bills. Today people are increasingly using electronic transactions to make purchases or transfer funds.

               There are about 72.5 million EFTPOS transactions each month[2]. This has almost doubled in the past seven 
       years.

              There are about 94 million direct entry credits and debits each month[3]. This has almost doubled in the past 
       seven years.

               There are about 86 million credit card transactions each month[4]. This has more than tripled in the past seven
       years.

June 2004.

Internet: www.bankers.asn.au. Ph: 02 8298 0417 Fax: 02 828 0402