As Andy Warhol said, "Cheques aren't money". Although they are a very good substitute, getting the benefit of a cheque can be frustratingly slow.
Funds my friend Gordon was expecting were delayed recently. Being in the fortunate position of having a nest-egg with the Halifax, this was no problem. He simply withdrew money from his Halifax savings account and paid the cheque into his Bank of Scotland current account.
As the expected funds arrived within 24 hours, he did not need the money. He immediately wrote a cheque and paid it into the Halifax. The sign "Cheques take seven days to clear" caught his eye and he realised his contingency plan had cost him dear.
The Halifax had taken the money from his savings account as soon as he was handed their cheque. However, it would take a few days before the money it represented was taken from the Halifax's own account. When Gordon paid his cheque into his savings account it would take a few days before he started earning interest on the cash. As the sum was large, he calculated he had lost more than £40 in interest by transferring money overnight to his current account.
One great mystery for accountholders is what banks call "the clearing system". Pay a cheque into an account and the cash it represents has to be obtained from the bank of the person who wrote it. Although they all use the same clearing system, the effect for customers varies between institutions.
Typically the money represented by a cheque begins to earn interest on the second business day after it is paid in and may be withdrawn on the next business day. However, some institutions have a longer cycle. National Savings takes two weeks to clear a cheque.
The clearing system is complicated. To avoid confusion over when you can withdraw money represented by a cheque, ask the cashier when you pay it in. All banks give timescales for clearing cheques in their literature.
Customers wishing to draw against money represented by a recently paid-in cheque are often puzzled. If withdrawing money from a cash machine they will normally see the message "Available £0" – even though they have a healthy balance. However, it is possible to draw against "uncleared" funds. When paying in a cheque, ask the cashier if you can make a withdrawal against it.
If the cheque is from a well-known source, the answer from banks will usually be "yes". However, you will normally be charged interest on the "uncleared" funds withdrawn. Since 1998, Barclays has allowed personal customers to withdraw up to £1,000 against uncleared cheques without paying interest.
The clearing system benefits banks as they make millions using the money represented by the cheques being cleared.
Last year the Cruickshank Report on Competition in UK Banking was critical of the length of the cycle. And in its spring newsletter, the British Cheque Cashers Association (BCCA) certainly does not anticipate any impending changes. Alarmingly, it considers that as changes to the system would be expensive, pushing the banks could spell the end of free banking.
As it costs banks about 50p to process each cheque, this would have a severe impact. The BCCA adds, "The banks would be only too pleased to get themselves off the unwelcome hook of free banking."
However, if Barclays can be fair without altering the system, why can't all financial institutions?Reuse content