Cheques are paper items which are physically transferred between banks at the same time as the electronic data is processed.  Although the paying bank receives some of the data electronically, the physical cheques themselves must also be transferred so that they can be examined by the paying bank for security and fraud prevention purposes.

The clearing system works within a three working day period (it does not operate on Saturdays, Sundays or Bank Holidays).

Day 1
When a cheque is paid into an account (at the collecting bank) it is sent to the bank’s clearing centre at the end of the working day.

Day 2
All cheques received are sorted at the clearing centre and the sort code, account number and serial number on the bottom of the cheque, together with the amount of the cheque, are sent electronically to the banks on which they are drawn (the paying bank) by 11am.

The physical cheque is then sent to the bank on which it is drawn.

Day 3
The paying bank debits the payer’s bank account with the amount of the cheque on the morning of Day 3. At the same time, all banks calculate the amount they must pay each other on the basis of the value of all the cheques exchanged on the previous day. The net balances are then settled across accounts held at the Bank of England.

This is the end of the central clearing cycle.

However, if the paying bank was unable to pay the cheque, for instance if the cheque owner has insufficient funds in their account, placed a stop on the cheque, or filled it out incorrectly, it would return the cheque to the original collecting bank on Day 3, or in certain specific circumstances, by 12 noon on Day 4. Cheques are generally returned by first class post, so the earliest the collecting bank will know that the cheque will not be paid is Day 4, or possibly Day 5.

A cheque may be returned later than Day 5 if it is found to be fraudulent. For instance if a fraudster has bought goods using a stolen cheque, the genuine owner may not discover until sometime after the goods have been exchanged that money is missing from their account. In this case, the money that has been paid into the seller’s account belongs to the genuine cheque owner and could be withdrawn once the fraud is discovered.  If you accept a cheque that subsequently turns out to be fraudulent, you may be required to return the funds.

Individual banks set their own policies on the point at which they credit funds on cheques paid into their customers’ accounts. Under The Banking Code, banks are required to provide clear details of their policies on the issues to their customers, and whether they add extra days to the central clearing cycle. Most high street banks allow customers to withdraw funds on the fourth or fifth working day, but some banks allow customers to withdraw funds as early as Day 1.