Banks are profiting from cheque clearance delay

An antiquated cheque clearing system is allowing UK banks to make large profits on interest payments while customers are made to wait for up to 11 days for their cheques to clear, according to a report published today.

The Consumers' Association says that the outdated process is failing consumers, in an age of high speed electronic communications, and is calling on the government to set up an independent regulator of payment systems.

According to the report, published in Which? magazine, it takes three days for a cheque to pass through the clearing system, while some consumers have to wait as long as another eight days before they can access their money.

Which? says that not only do these delays cause frustration to customers, but banks and building societies can earn interest on their customers' money while denying them access to their cash.

A report, commissioned by the government on UK banking services, has concluded that systems for cheque clearing and electronic transfers of money are stuck in the 19th century, and the UK is falling behind other countries, mainly because the major banks control the payments systems, which stifles competition and innovation.

The Consumers' Association arranged for 22 volunteers to pay in 440 cheques to the top 11 institutions. More than a quarter of the cheques failed to clear by the time the banks claimed they would.

All the cheques paid into Barclays and NatWest cleared a day later than they should have. Half the cheques paid into Lloyds TSB cleared a day late, as did a quarter of those paid into the Co-Operative Bank, HSBC and Nationwide.

While some banks let customers withdraw the money from their current account on day four, Alliance and Leicester, Bank of Scotland, Northern Rock, the Royal Bank of Scotland, Yorkshire Bank and the Woolwich all make customers wait five days.

Bristol & West is the slowest for savings accounts, with customers having to wait 11 days. Asked for justification the bank said it used another bank to clear cheques.

Which? also found that consumers got a raw deal when transferring money electronically. An electronic payment leaves the payer's account on day one but can take until day four to arrive in the payee's account, if they bank at different institutions. In contrast, money paid by consumers to businesses by direct debit is credited to the company's account on the same day.

The report says the delay in clearing cheques is caused because the 8m cheques written each day are posted around the country, while bounced cheques are also returned by mail - so the bank has to wait for the post to arrive before it can be sure that it can pay a cheque.

Which? editor Graeme Jacobs said it was not in the banks' interest to change the system.

"Unfortunately banks benefit from this delay - in most cases they receive the money before letting you get at it, in which time they invest and earn interest on it. Given that banks are profiting in this way, it is hardly surprising that they are not pushing to bounce cheques electronically.

"This is one of the ways in which banks are short changing their customers, and it is about time they were forced to act more fairly," he added.