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What Is the CTS Clearing Process?

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The GoCardless content team comprises a group of subject-matter experts in multiple fields from across GoCardless. The authors and reviewers work in the sales, marketing, legal, and finance departments. All have in-depth knowledge and experience in various aspects of payment scheme technology and the operating rules applicable to each. The team holds expertise in the well-established payment schemes such as UK Direct Debit, the European SEPA scheme, and the US ACH scheme, as well as in schemes operating in Scandinavia, Australia, and New Zealand. See full bio

Last editedSept 20212 min read

Processing paper cheques can be a time-consuming process with the potential for fraud if care is not taken. The cheque truncation system, or CTS, is designed to solve these problems by digitising the clearing process. We’ll explore how the CTS clearing process works below, as well as its benefits for banks and businesses alike.

What is the cheque truncation system?

Cheque truncation describes the process of replacing a physical paper cheque with an electronic image during the payment clearing process. Rather than waste time and money transferring physical cheques from one bank to another, the digital image is transferred electronically along with all identifying details such as the date and MICR band.

Without cheque truncation, the settlement period can take several days. If you receive a paper cheque, you’d need to present it to your bank. Your bank would then forward it to the drawee’s bank, with money credited to and debited from the two accounts after verification and clearance.

Originally, cheques were examined manually and at high cost. When machine readable MICR codes were added to paper cheques in the 1960s, this helped speed up processing times. Cheque truncation was the next generation of technology to streamline this whole process, first introduced in the 1990s. Digital images of each cheque provide detailed visuals for verification, data matching, and other activities typically carried out as part of the clearing process.

As a result, the CTS clearing process reduces settlement times for quicker transactions. It also offers a greater level of security, with less potential for human error.

Understanding the cheque truncation system process flow

You can divide the cheque truncation system into two processes.

Outward clearing is a process taking place at the bank branch level. This is where deposited cheques are electronically scanned and verified before sent on to the service branch.
Inward clearing is the process taking place at the service branch, where the received cheques are verified and balanced. The cheques are then sent on to a clearing house.

Here’s a step-by-step description of how the cheque truncation system process flow works.

Step 1: The branch uses a scanner and processing software to capture the cheque’s data, including details of its MICR band and images.
Step 2: The branch sends the cheque image and data to a central processing location or clearing house. At the clearing house, the data is processed and verified.
Step 3: The clearing house transmits the data on to the paying or destination bank branch, using the clearing house interface to ensure a secure transaction. At this stage, the payment is processed and the funds credited or debited from both bank accounts.

Security is built into every step of cheque truncation Australia, with all details encrypted during the processing phases.

Benefits of cheque truncation Australia

When compared to paper cheque processing, there are numerous benefits of the cheque truncation system. Here are just a few reasons why multiple governments choose to use a CTS clearing process.

It minimises the cost of processing cheques
It streamlines the cheque processing flow
There’s no need to use courier services to transport documents
It reduces paper waste
Image-based verification helps protect customers from fraud
There’s less chance of human error during processing
The time it takes for processing is reduced for faster funds clearance

Limitations of the CTS clearing process

However, not all countries have invested in cheque truncation technology, and laws will vary by location. This is because many regions are focusing on phasing out cheques entirely as a mode of payment, instead using other types of electronic payment systems. Although cheque truncation cuts down on processing speed and costs, it still involves the use of paper cheques at the original buyer’s end. While digital images reduce the need for paper handling, this is still a somewhat outdated system compared to fully electronic payments.

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