Simply put, a cheque is a document that orders a bank or any other financial institution to pay a specific amount of money from a person's account to another account holder in whose name the cheque has been issued.
However, the money is often received between two to three days due to various reasons including the clearinghouse process, settlement procedures and networking framework.
Christopher Richards, a Contract Law expert explained that when a cheque is first written, it is first sent to the issuer's bank, where the financial institution subjects it to a clearance process known as the clearinghouse framework.
"Clearinghouse is a network of banks that facilitates the exchange of cheques. The clearinghouse takes one day to process a cheque, but that is just the beginning of the process," Richards explained.
Once the cheques have been processed by the clearinghouse, it is sent back to the issuer's bank, which will take another whole day while taking it through a process known as settlement.
"Your bank then takes one day to settle the cheques, which means that it removes the funds from your account and sends them to the recipient's bank," Richards explained.
Upon settlement, a cheque will be taken through the last stage which by financial terms is referred to as the float.
"The float period is the time between when you write a cheque and when the funds are actually deducted from your account. The float period is typically three days, but it can vary depending on the bank and the type of cheques," Richards explained.
The Contract Law expert explained that the three-day clearing process helps to protect both banks and customers from fraud.
It gives banks time to verify that the cheques are legitimate and that the funds are available. It also gives customers time to catch any errors in their accounts.
However, Richards also explained that there are a few ways to speed up the clearing process for bank cheques. One way is to use a cashier's cheque or a money order.
He noted that such types of cheques are guaranteed by the bank in order to clear more of them faster.
"Another way to speed up the clearing process is to use online banking. When you deposit cheques using online banking, the funds are typically available in your account the same day," Richards explained.
He also observed that out-of-network cheques may take longer to clear than cheques that are written within your bank's network.
"At the same time, personal cheques typically take longer to clear than business cheques. Traveller's cheques typically take longer to clear than other types of cheques," Richard explained.
