Learning Objectives:

• Explain how Automated Clearing Houses (ACH) and net settlement work.

• Describe the cheque clearing process and its evolution.

• Distinguish between wholesale and retail payment systems.

4.1 Automated Clearing Houses (ACH)
An Automated Clearing House is a system that processes retail payments—high-volume, lower-value transactions such as direct deposits, bill payments, and business-to-business payments . Unlike RTGS, ACH payments are typically processed in batches and settle on a net basis .

In a net settlement system, a clearing house collects all payments during a cycle and calculates the net obligation (the difference between what a bank owes and what it is owed) for each participant . At a designated settlement time, only these net amounts are settled between banks, reducing the total value that needs to be transferred .

4.2 The Cheque Clearing Process
The cheque clearing process involves the physical and electronic exchange of cheques between financial institutions . The steps include:

1. A cheque is deposited at the payee’s bank.

2. The cheque is routed to the payer’s bank for payment through the clearing system.

3. The payer’s bank verifies the cheque and debits the payer’s account.

4. The funds are settled between the banks, and the payee’s account is credited.

The process has evolved with technology. For example, the introduction of cheque truncation—where physical cheques are converted to electronic images—reduces the clearing time significantly . The aim is to move from T+3 (three days) to T+1 or even same-day clearing .

4.3 Wholesale vs. Retail Systems
Payment systems are broadly categorized based on value and volume :

• Wholesale/Large-Value Systems: Process a small number of high-value, time-critical transactions. They are typically RTGS systems and are subject to stringent risk controls.

• Retail/Low-Value Systems: Process a large volume of smaller-value transactions. They are often ACH-based and rely on net settlement for efficiency.