Letter to the Editor-Cheque clearing in real time possible and brings benefits |06 July 2010

While your observation that an electronic payment will generally deliver a “more efficient service” is correct, the efficiency of a payment system is as good as what it is expected to do.

When you deposit another bank’s cheque in your bank account with your bank, you are, in practical legal terms, authorising your bank to go over to the other bank and negotiate the payment of the value specified on the cheque.

This is what they used to do in the old days before the existence of the Central Bank, and that could take days. And time literally costs money, even in those days.  At the present time, when you deposit a cheque in your bank account drawn on a different bank, an employee of your bank physically takes the cheque to the Central Bank where he (or she) will meet his or her counterpart from the other bank to exchange cheques drawn from each other’s bank. Thus only the venue has changed.
 
Hence Nouvobanq, for example, will tally all the Barclays cheques its clients have deposited in their accounts the day before and physically take them to the Central Bank, where both banks have money deposited. There the Nouvobanq rep will meet the representative of Barclays to verify the value of each other’s cheques being negotiated and authorise the transfer of the net amount into one or the other’s account with the Central Bank (whichever has the larger amount gets the balance paid into its account) and debit or credit each other’s accounts with themselves.

However, neither of them knows whether the customer whose cheque is being negotiated actually has money in his or her account until the reps are back at their respective banks. Any bounced cheque would then be the subject of the same exercise the following day, where the bounced cheque would be returned to the bank where it had been deposited and the money refunded to the original bank.

Today, this transaction takes three working days before your bank can safely say to you that the money is yours. Now you know why your bank charges you a hefty fee for writing a cheque without adequate funds.

There is a larger economic and financial implication than appears on the surface for this transaction.

Firstly, as the beneficiary of the cheque payment, you cannot make use of the money for three working days after you have deposited it with your bank. This time frame could extend to five days when the weekend is taken into account, since the cheque clearing exercise does not operate on a Saturday.

Secondly, the exercise means huge sums of money are held in escrow accounts at any one time by the various banks, which literally means money withdrawn from circulation, which could have a negative impact on the general level of interest rates.

Imagine 50 cheques of R100 million each being negotiated. Should one of the banks involved suddenly stop operating or be declared insolvent, a customer with a cheque for a huge amount could find himself in serious trouble.

This scenario actually happened to a Dutch bank which became insolvent, locking tens of millions of dollars in international payment transactions and nearly causing an international financial crisis.

Although the Central Bank does not publish these statistics anymore (shame!), according to its last published annual report (2007), in that year 629,724 cheques were cleared for a total value of R2,382,069,000 (that’s 2.3 billion); 2,519 cheques were cleared on average every day totalling R9, 528,000 that year, which meant around R30 million rupees were removed from circulation on an average day. Then the banking system accounted for just over R4 billion. Today it is over R6 billion.

With advanced technology, it is possible to make cheque clearing in real time where commercial banks would not need to carry briefcase loads of cheques to the Central Bank. Such a system is in operation in Kenya and Mauritius. The Kenyan system should be of particular interest because it allows banks to clear each other’s cheques in the space of two hours.

This means that one can accept a cheque, have it cleared by one’s bank and deliver the goods or services to one’s customers the same day. Currently, to ease immediate cheque clearance, banks charge a hefty fee and “immediate” can be a whole day.

Under the Kenyan system, banks continuously clear cheques during opening hours, hence there should be no need for special arrangements.

This would be of particular help to small businesses which would be able to accept cheques from a larger number of customers and have funds in their bank accounts sooner, regardless of which bank your customer banks with, without risk of default.

It would also encourage the use of cheques in transactions rather than cash, thereby providing better security in tills. 

Paul Chow