Australian
Payments
Clearing
Association
FACT SHEET
CHECK THE FACTS
ON Cheques
Cheques are the oldest form of non-cash
payment and, apart from cash, were the
main payment form in Australia until the
1980s. They have become less common in
recent years as faster and more convenient
payment systems have taken over.
These days cheques are typically used to make payments by
mail – or where immediate value is not required and where other
faster payment systems are not available. A benefit of cheques
is that the recipient does not need to have any special facilities
or technology in place to accept them.
Although cheque transactions are declining in Australia, there
are still around 1.5 million cheques written every business day.
How are cheques processed?
Most people who receive cheques (payees) deposit them
with their own financial institution. Usually their account will
be credited immediately and an electronic payment record
containing details from the cheque is created and sent to
the cheque writer’s (payer’s) financial institution. The payer’s
account is then debited if the cheque is to be paid by the
payer’s financial institution.
Cheque
CUSTOMER
(PAYER)
1
MERCHANT/
SERVICE
PROVIDER
(PAYEE)
Cheque
2
Clear
Cheque
CUSTOMER’S
FINANCIAL
INSTITUTION
3
4
Funds
Transfer
MERCHANT’S
SERVICE
PROVIDER’S
FINANCIAL
INSTITUTION
Can I draw funds against a cheque
immediately?
When you deposit a cheque into your account, your account is
credited with the amount of the cheque on the same day. If the
account is interest bearing, interest begins to accrue immediately.
However, you may not necessarily have access to the proceeds
of the cheque from day one. Often customers must wait for a few
days so that financial institutions can “clear” cheques.
Why do cheques need to be cleared?
When you issue a cheque, you are giving your financial
institution written instructions to pay a specific amount from
your account. The cheque clearance cycle makes it possible for
financial institutions to complete the necessary checks to make
sure payment is made in accordance with your instructions.
As cheques are a paper based payment instrument, they need
to be physically presented to the financial institution they are
drawn on for payment decisions. The payment record that
is electronically transmitted to the payer’s financial institution
speeds up the process of checking that there are sufficient
funds available in the account to make payment. However, the
cheque can be still dishonoured for other reasons if for example,
it is not signed in accordance with the authority held at the
financial institution.
As part of the clearance cycle, the cheque you deposit is
physically transported from your financial institution to the
financial institution where the payer’s account is held and the
payer’s instructions are verified.
How long does it take for a cheque to
be cleared?
Typically, the cheque clearance cycle takes 3 business days.
This covers the time it takes for the cheque to travel from one
financial institution to the other as well as the time it would take
for an advice to get back to the payee’s financial institution
if the cheque were to be dishonoured. Staff at your financial
institution can confirm the normal clearance period at the time
of depositing the cheque.
What happens on each day of the cheque
clearance cycle?
Business Day 1: On the day you deposit a cheque into
your account your financial institution credits you with the
amount of the funds. It then sends the cheque and transmits
payment details electronically overnight to the payer’s financial
institution, which in turn debits the amount of the cheque from
the payer’s account.
Business Day 2: The payer’s financial institution checks
amongst other things that there are sufficient funds in the
payer’s account to cover the cheque.
If the cheque is dishonoured, the payer’s account is reimbursed
with the funds debited on Day 1. The cheque is returned
overnight to your financial institution and the funds that were
credited to your account on Day 1 are reversed.
Business Day 3: Providing the cheque was not dishonoured on
Business Day 2, the cheque is cleared, and you have access to
the funds credited to your account on Day 1.
If the cheque was dishonoured on Day 2, your financial
institution will give you details of the reason.
Australian
Payments
Clearing
Association
FACT SHEET
CHECK THE FACTS
ON Cheques (continued)
Business Day 1
YOUR FINANCIAL
INSTITUTION
Business Day 2
Cheque
PAYER’S FINANCIAL
INSTITUTION
Business Day 3
Advise
(If dishonoured)
YOUR FINANCIAL
INSTITUTION
CHEQUE PAID?
Funds paid into your account
Funds out of payer’s account
YES
NO
Funds are reversed out of your account
You can withdraw the funds
Funds are paid back into the payer’s account
Why would a cheque be dishonoured?
The most common reason for dishonouring a cheque is that there
are insufficient funds in the payer’s account to cover the cheque.
Other reasons include payment has been stopped by the payer,
the cheque is unsigned or not signed in keeping with the account
authority held by the financial institution, or it has been materially
altered and the payer has not authorised the alteration.
Why would the payer stop payment on
the cheque?
A cheque may be stopped for many reasons, but most often,
because it has been reported as lost or stolen by the payer.
If you are given a cheque and subsequently lose it or believe
it has been stolen, you should contact the payer immediately.
The payer will then instruct his or her financial institution to put
a stop payment on the cheque. Similarly, if you issue a cheque
and then decide to stop payment, you should contact your
financial institution immediately and provide full details of the
cheque. Provided the cheque has not already been paid, the
paying financial institution will dishonour it when it is presented
for payment.
What if I need the funds sooner?
If you need to know whether the cheque will be paid earlier
than the usual 3 business days it takes for the cheque to clear,
you can ask your financial institution to arrange a “Special
Clearance”. Under this arrangement, your financial institution
will send the cheque directly to the payer’s financial institution.
As soon as it is received by the payer’s financial institution it will
be actioned, and your financial institution advised whether the
cheque will be paid. Your financial institution can give you more
information about the special clearance options available.
Will I get paid quicker if I ask for a
financial institution cheque?
While financial institution cheques are a relatively safe payment
method, they are not equivalent to cash, and still need to be
cleared. However, unlike personal cheques, the funds for these
types of cheques are collected at the time of issue, so the cheque
cannot be dishonoured for insufficient funds. Nonetheless, the
issuing financial institution will still need to check that the cheque
is in order and has not been altered in any way.
If you want to ensure that a financial institution cheque is valid
before accepting it as payment, you can contact the issuing
financial institution and ask it to confirm that all the cheque’s
details are correct.
What if the cheque I am given is payable to
another name?
A cheque that is given to you, but is not made out in your name,
is known as a “third party cheque”. You must exercise care when
accepting these types of cheques. Unless you can prove that
the named recipient has transferred the cheque over to you, your
financial institution may refuse to deposit it into your account.
What can be done to reduce the chance of
a cheque being altered?
When writing a cheque, always take care to fill in the details in a
way that will be difficult to alter. For example do not leave gaps
between the words and figures, begin the amount in words as
close as possible to the left hand side and fill in the amount
in figures as close as possible to the dollar sign. Never fill out
a cheque in pencil or ink that can be erased and never sign a
cheque before it is completely filled out.
Disclaimer: The material in this brochure is provided for general information
purposes only. There may be some variations in practices depending on your
financial institution.
Australian Payments Clearing Association ABN 12 055 136 519. GPO Box 4893 Sydney NSW 2001 Tel. 61 2 9221 8944 Fax. 61 2 9221 8057