Check clearing

Cheque clearing (or check clearing in American English) or bank clearance is the process of moving a cheque from the bank in which it was deposited to the bank on which it was drawn, and the movement of the money in the opposite direction. 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.

The process would take a number of days as cheques would have to be physically taken back to the issuing bank until the development of cheque truncation in the 1990s. In many countries this would be via a central clearing house operated by the banks to make the process more efficient. If there was 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.

With the development of cheques in England in the 1600s it was customary to return the cheque to the issuing bank for payment. However as cheque usage grew some customers would deposit a cheque with their own bank who would arrange for it to be returned to the issuing bank for payment. Until about 1770, an informal exchange of cheques took place between London banks. Clerks of each bank visited all the other banks to exchange cheques, whilst keeping a tally of balances between them until they settled with each other. Daily cheque clearing began around 1770 when the bank clerks met at the Five Bells, a tavern in Lombard Street in the City of London, to exchange all their cheques in one place and settle the balances in cash.

By the 1800s a dedicated space was established, known as a bankers' clearing house. The London clearing house used a method where each bank paid cash to and then was paid cash by an inspector at the end of each day. This method spread to a number of other countries and by 1853, the New York clearing house used a large oval table and two clerks from each bank. An outer ring of clerks would rotate at set intervals, settling payments in cash with each bank on a pairwise basis.

...
Wikipedia