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May 23, 2005

Faster Cheque Clearing?

It appears that the Office of Fair Trading is leaning on the banks to speed up the processing of cheques. You may think and quite right too. Actually, that’s not the biggest news, for cheques are, by definition, physical items, and it takes time to move them around. The big news is that they have already reached agreement on standing orders and direct debits:

The OFT's payments systems task force, set up in Gordon Brown's pre-budget report in November 2003, is expected to announce an agreement between the big banks in the coming days, which will allow direct debits and standing orders to be transferred overnight rather three days as under the current system.

Not everyone has been on both sides of one of these transactions so you may be a little surprised to find out that money electronically removed from your account does not turn up in the other’s account for three days. The justification for this was that this is what happened with cheques, so why not? ( I would note that here in Portugal it is seven days.)

International transfers also have their delays. Even using the SWIFT system, which moves money in under an hour from country to country, banks tend to delay things along the way, four or five days not being unusual.

Why is this? It’s all about something called the "float".

Banks, as you are probably aware, make their money in two ways. One is fees for services, so much per cheque, so much per payment. The other is lending out money at a higher price (interest rate)  than they pay for it. When your standing order to pay your gas bill leaves your account it sits in the bank’s treasury account for a couple of days before being sent to the gas supplier. Your 54.50 doesn’t make any damn difference at all, of course. But everyone’s gas bills, their electricity, mortgages, blah, blah, add up to a fair old sum of money. At any one time, tens of billions. So, they only get to hold on to it for a couple of days, but borrowing money for nothing and lending it at base plus 3%, on tens of billions, makes a fortune for the banks.

If the OFT (which I don’t think it will manage to do) really does manage to make electronic payments immediate then the banks profits are going to take a right old hammering. Might be a good time to sell any such shares you have.

May 23, 2005 in Business | Permalink


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Hi Tim

Interesting blog. Just to reveal my hand, I used to work in corporate comms for several of the big UK banks. I no longer do, but I do have significant insight into this issue.

Just to clarify some misconceptions in your post. Firstly there is no float on cheques. Value is transferred from payee to payer on the same day - day 3 usually. As you say cheques actually have to travel around the country before they can be verified, hence the delay.

The electronic payments issue is another story. I'm sure it would be possible to speed up the process. What I'm also sure about is that it would certainly not make a large dent in any of the banks' profits. You'll just have to take my word for that.

No need to sell those bank share just yet!



Posted by: Alex Bellinger | May 23, 2005 9:53:27 AM

Don't get your investment advice from blogs. Clearing system float is of the order £m hundreds. Which is not nothing, but given that Royal Bank had PBT of more than £5bn last year, it's not the swing factor.

Posted by: dsquared | May 23, 2005 10:02:36 AM

"Don’t get this:

The July summit meeting of rich nations in Scotland

How many nations are there in Scotland?"

And what is a faster cheque?

Posted by: dearieme | May 23, 2005 12:41:19 PM

Hi Tim,
I could be wrong about this, but I seem to recall reading (and reacting skeptically) that banks cannot use the float on checks, standing orders, and direct debits for the treasury markets.

But, like I said, I could be wrong, and I was rather skeptical about it myself.


Posted by: James | May 23, 2005 1:40:19 PM

In which case, there's even less reason for them not to complete craniorectal extraction and GIVE ME MY MONEY!

Posted by: Alex | May 23, 2005 1:45:00 PM