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Concept
Cheque clearing
Summary
Cheque clearing (or check clearing in American English) or bank clearance is the process of moving cash (or its equivalent) from the bank on which a cheque is drawn to the bank in which it was deposited, usually accompanied by the movement of the cheque to the paying bank, either in the traditional physical paper form or digitally under a cheque truncation system. This process is called the clearing cycle and normally results in a credit to the account at the bank of deposit, and an equivalent debit to the account at the bank on which it was drawn, with a corresponding adjustment of accounts of the banks themselves. If there are not enough funds in the account when the cheque arrived at the issuing bank, the cheque would be returned as a dishonoured cheque marked as non-sufficient funds.
Cheques came into use in England in the 1600s. The person to whom the cheque was drawn (the "payee") could go to the drawer's bank ("the issuing bank") and present the cheque and receive payment. Before payment, the drawer's bank would check that the cheque was in order – e.g., that the signature was that of the drawer, that the date was valid, that the cheque was properly set out, etc. Alternatively, the payee could deposit the cheque with their own bank who would arrange for it to be presented to the issuing bank for payment.
Until around 1770 an informal exchange of cheques took place between London banks. Clerks of each bank visited all of the other banks to exchange cheques, whilst keeping a tally of balances between them until they settled with each other. Daily cheque clearings began around 1770 when the bank clerks met at the Six Bells, a tavern in Dove Court off Lombard Street in the City of London, to exchange all their cheques in one place and settle the balances in cash.
The first organization for clearing cheques was the Bankers' Clearing House, established in London in the early 19th century. It was founded by Lubbock's Bank on Lombard Street in a single room where clerks for London banks met each day to exchange cheques and settle accounts.
Official source
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