History[edit]
England[edit]
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.[2]
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.[3] In 1832 Charles Babbage, who was a friend of a founder of the Clearing House, published a book on mass production, The Economy of Machinery and Manufactures, in which Babbage described how the Clearing House operated:[4]
Operation[edit]
When a bank customer deposits a cheque, which may be drawn on any bank, the bank would credit the depositor's account with the amount of the cheque. However, the amount so credited is "not available" to the depositor until the cheque has been cleared by the paying bank.
For cheques drawn on a customer of the same bank, the bank would, usually on the next business day, ensure that the cheque is in order and debit the account of the drawer, and the cheque would be taken to have been cleared. A cheque is not in order if, for example, the date is invalid, the drawer's signature is not like the one held by the bank, the wrong number of signatories have signed the cheque, etc. There must also be sufficient cleared funds in the account before the drawer's account is debited.
Cheques drawn on another bank (termed "the issuing bank" or "paying bank") need to be "presented" to the other bank before the deposit bank receives payment to cover the amount credited to the depositor's account. In the absence of the paying bank notifying the deposit bank of the "special clearance" of the cheque, for example, following a request from the deposit bank, the funds become available after the passing of an agreed "clearance period", commonly three business days, when the depositor's account is described as comprising "cleared funds".
If the cheque is not in order, or if there are not enough cleared funds in the account when the cheque arrived at the issuing bank, the cheque would be returned as a dishonoured cheque marked appropriately, such as "non-sufficient funds" or "present again".[1]
All banks might have clerks to take cheques drawn on other banks to those banks, and wait for payment. Clearing houses were set up to streamline the process by collected all cheques drawn on other banks, and collecting payment from those banks for the total to be cleared.[11]
Automation[edit]
Cheque processing[edit]
As volume grew, more efficient sorting methods were developed. Approaching the 1940s, two popular methods were Sort-A-Matic and Top Tab Key. Sort-A-Matic involved a set of metal or leather dividers numbered 00 through 99, operated to implement a form of radix sort: cheques would be sorted by hand according to the first two digits. The cheques would be removed, and each stack sorted into the same dividers by the third and fourth digits. The process was iterated until the cheques were completely sorted. Top Tab Key used a physical mechanism: holes were punched in the top of each cheque representing the values of various digits, and metal keys used to physically move them until sorted.
Magnetic ink character recognition (MICR) was developed and commercialized in the 1950s, and enabled computers to reliably read routing and account numbers and automated the sorting of paper cheques.