Payments Training Hub
Cheque bounces when the paying bank returns PAYMENT OPERATIONS STARTED LIVE 01 Cheque bounces when the paying bank - unpaid, and the most common ACTIVE 02 Reason - Each reason carries a return code QUEUED 03 Supplier - business must now pay again QUEUED 04 Business that repeatedly issues cheques - will lose its cheque book QUEUED 05 Payee - United Kingdom, the payee can sue QUEUED A cheque bounces when the paying bank returns it unpaid, and the most common reason is insufficient funds, which means the drawer account does not hold enough money to cover the amount. Step 1 of 5 Cheque bounces when the paying bank returns STARTED Cheque bounces when the paying bank unpaid, and the most common reason ACTIVE Reason Each reason carries a return code QUEUED Supplier business must now pay again QUEUED Business that repeatedly issues will lose its cheque book QUEUED Payee United Kingdom, the payee can sue QUEUED A cheque bounces when the paying bank returns it unpaid, and the most common reason is insufficient funds, which means the drawer account does not hold enough money to cover the amount.
Reason carries a return code PAYMENT OPERATIONS IN PROGRESS LIVE 01 Cheque bounces when the paying bank - unpaid, and the most common DONE 02 Reason - Each reason carries a return code ACTIVE 03 Supplier - business must now pay again QUEUED 04 Business that repeatedly issues cheques - will lose its cheque book QUEUED 05 Payee - United Kingdom, the payee can sue QUEUED Each reason carries a return code, and the code tells the collecting bank and the payee exactly why the payment failed. Step 2 of 5 Reason carries a return code IN PROGRESS Cheque bounces when the paying bank unpaid, and the most common reason DONE Reason Each reason carries a return code ACTIVE Supplier business must now pay again QUEUED Business that repeatedly issues will lose its cheque book QUEUED Payee United Kingdom, the payee can sue QUEUED Each reason carries a return code, and the code tells the collecting bank and the payee exactly why the payment failed.
Supplier: told cheque bounced PAYMENT OPERATIONS IN PROGRESS LIVE 01 Cheque bounces when the paying bank - unpaid, and the most common DONE 02 Reason - Each reason carries a return code DONE 03 Supplier - business must now pay again ACTIVE 04 Business that repeatedly issues cheques - will lose its cheque book QUEUED 05 Payee - United Kingdom, the payee can sue QUEUED The supplier is told the cheque bounced, and the business must now pay again, either by a new cheque or by an electronic transfer, and the relationship is damaged. Step 3 of 5 Supplier: told cheque bounced IN PROGRESS Cheque bounces when the paying bank unpaid, and the most common reason DONE Reason Each reason carries a return code DONE Supplier business must now pay again ACTIVE Business that repeatedly issues will lose its cheque book QUEUED Payee United Kingdom, the payee can sue QUEUED The supplier is told the cheque bounced, and the business must now pay again, either by a new cheque or by an electronic transfer, and the relationship is damaged.
Business that repeatedly issues cheques that bounce PAYMENT OPERATIONS IN PROGRESS LIVE 01 Cheque bounces when the paying bank - unpaid, and the most common DONE 02 Reason - Each reason carries a return code DONE 03 Supplier - business must now pay again DONE 04 Business that repeatedly issues cheques - will lose its cheque book ACTIVE 05 Payee - United Kingdom, the payee can sue QUEUED A business that repeatedly issues cheques that bounce will lose its cheque book, because the bank can withdraw the facility, and suppliers will start demanding payment in advance. Step 4 of 5 Business that repeatedly issues cheques that bounce IN PROGRESS Cheque bounces when the paying bank unpaid, and the most common reason DONE Reason Each reason carries a return code DONE Supplier business must now pay again DONE Business that repeatedly issues will lose its cheque book ACTIVE Payee United Kingdom, the payee can sue QUEUED A business that repeatedly issues cheques that bounce will lose its cheque book, because the bank can withdraw the facility, and suppliers will start demanding payment in advance.
Payee can sue PAYMENT OPERATIONS COMPLETE LIVE 01 Cheque bounces when the paying bank - unpaid, and the most common DONE 02 Reason - Each reason carries a return code DONE 03 Supplier - business must now pay again DONE 04 Business that repeatedly issues cheques - will lose its cheque book DONE 05 Payee - United Kingdom, the payee can sue ACTIVE In the United Kingdom, the payee can sue for the debt in the civil courts, and a cheque is strong evidence that the debt exists. Step 5 of 5 Payee can sue COMPLETE Cheque bounces when the paying bank unpaid, and the most common reason DONE Reason Each reason carries a return code DONE Supplier business must now pay again DONE Business that repeatedly issues will lose its cheque book DONE Payee United Kingdom, the payee can sue ACTIVE In the United Kingdom, the payee can sue for the debt in the civil courts, and a cheque is strong evidence that the debt exists.

Key points of this lesson, in order.

0:00 / 2:55 Step 1 of 5

When a Cheque Bounces

Cheques and Paper Instruments, Lesson 5 of 7, Narration 2:55, D01 Foundations of money and payments

ClearingMandateReturn

What you will learn

Your objective. By the end of this lesson, you will be able to explain cheque bounces. A cheque bounces when the paying bank returns it unpaid, and the most common reason is insufficient funds, which means the drawer account does not hold enough money to cover the amount.

Why it matters. A business analyst must know the local law for the market being served, because the return codes, the notice periods and the customer letters all change with the jurisdiction, and the product must support the right process for each country.

Chapter objective: Paper instructions, clearing and the pull model

Key learning points

  • Cheque bounces when the paying bank returns
  • Reason carries a return code
  • Supplier: told cheque bounced
  • Business that repeatedly issues cheques that bounce
  • Payee can sue

Key terms

Clearing: The process of exchanging payment instructions between banks and calculating what each bank owes the others.

Mandate: An authorisation given by a debtor to a creditor to collect payments from the debtor account by direct debit.

Return: A payment that is sent back to the sender after settlement because it cannot be credited to the beneficiary.

Payment flow diagram showing When a Cheque Bounces.

Practise this lesson

Exercise

Work out what the beneficiary receives for a GBP 4,750 payment under OUR, SHA and BEN.

Use the charge arrangement rules in this lesson and the correspondent and beneficiary bank fees named in the lesson.

  1. What to do. Calculate the amount credited under each of the three arrangements and state who pays each fee.

Correct result. Under OUR the sender pays all charges and the beneficiary receives the full amount. Under SHA the sender pays the sending charges and the beneficiary pays the receiving charges. Under BEN the beneficiary pays all charges and receives the amount less all fees.

Why. The charge arrangement decides who pays and how much arrives. A customer who was promised the full amount and receives less will complain, and the complaint lands on the analyst.

Check your understanding

Practice question

Which of the following best describes cheque bounces?

Takeaway and next step

What to remember

A business analyst must know the local law for the market being served, because the return codes, the notice periods and the customer letters all change with the jurisdiction, and the product must support the right process for each country.

Follow GBP 4,750 through every stage, from instruction to beneficiary credit, and note where it can stop.

Open the Payment Lifecycle Simulator →

Builds on "Cheque Clearing: Physical, Image-Based Truncation and Timelines".

Transcript and full text

Show transcript

A cheque bounces when the paying bank returns it unpaid, and the most common reason is insufficient funds, which means the drawer account does not hold enough money to cover the amount. Other reasons include a signature that does not match the mandate, a cheque that is out of date or post dated, a stop payment instruction from the drawer, a closed or frozen account, and an amount in words that does not match the amount in figures. A cheque can also bounce because the image is unreadable, the magnetic ink line is damaged, or the cheque has already been paid, which the bank detects as a duplicate. Each reason carries a return code, and the code tells the collecting bank and the payee exactly why the payment failed. When a cheque bounces, the clearing system sends a return message to the collecting bank, and the collecting bank reverses the credit it gave the payee. If the supplier account was credited GBP 4,750 on Tuesday and the cheque is returned on Wednesday, the collecting bank debits GBP 4,750 from the supplier account, so the supplier loses the money it thought it had. Both banks usually charge a fee for a returned cheque, so the drawer may pay a return fee of GBP 10 to GBP 25, and the payee may pay a similar fee, which adds cost to an already failed payment. The supplier is told the cheque bounced, and the business must now pay again, either by a new cheque or by an electronic transfer, and the relationship is damaged. The drawer can prevent a bounce by keeping enough funds in the account, by checking the signature and the amounts before issuing the cheque, and by telling the payee if a payment will be late. If a cheque does bounce, the drawer should contact the payee immediately, explain the reason, pay the amount by another method and cover any charges the payee suffered. A business that repeatedly issues cheques that bounce will lose its cheque book, because the bank can withdraw the facility, and suppliers will start demanding payment in advance. A product owner should consider whether the app warns the drawer when the balance is close to the cheque amount, because an early warning is cheaper than a bounce, a fee and a lost supplier. Legal recourse depends on the country, but in most places a bounced cheque is a civil matter first and a criminal matter only when there is intent to defraud. In the United Kingdom, the payee can sue for the debt in the civil courts, and a cheque is strong evidence that the debt exists. In India, a bounced cheque can lead to criminal proceedings under the Negotiable Instruments Act when the drawer fails to pay after a legal notice, which makes the consequences far more serious. In the United States, a bad cheque can lead to civil action and, in some states, criminal charges for repeat offences. A business analyst must know the local law for the market being served, because the return codes, the notice periods and the customer letters all change with the jurisdiction, and the product must support the right process for each country.

A cheque bounces when the paying bank returns it unpaid, and the most common reason is insufficient funds, which means the drawer account does not hold enough money to cover the amount. Other reasons include a signature that does not match the mandate, a cheque that is out of date or post dated, a stop payment instruction from the drawer, a closed or frozen account, and an amount in words that does not match the amount in figures. A cheque can also bounce because the image is unreadable, the magnetic ink line is damaged, or the cheque has already been paid, which the bank detects as a duplicate. Each reason carries a return code, and the code tells the collecting bank and the payee exactly why the payment failed.

When a cheque bounces, the clearing system sends a return message to the collecting bank, and the collecting bank reverses the credit it gave the payee. If the supplier account was credited GBP 4,750 on Tuesday and the cheque is returned on Wednesday, the collecting bank debits GBP 4,750 from the supplier account, so the supplier loses the money it thought it had. Both banks usually charge a fee for a returned cheque, so the drawer may pay a return fee of GBP 10 to GBP 25, and the payee may pay a similar fee, which adds cost to an already failed payment. The supplier is told the cheque bounced, and the business must now pay again, either by a new cheque or by an electronic transfer, and the relationship is damaged.

The drawer can prevent a bounce by keeping enough funds in the account, by checking the signature and the amounts before issuing the cheque, and by telling the payee if a payment will be late. If a cheque does bounce, the drawer should contact the payee immediately, explain the reason, pay the amount by another method and cover any charges the payee suffered. A business that repeatedly issues cheques that bounce will lose its cheque book, because the bank can withdraw the facility, and suppliers will start demanding payment in advance. A product owner should consider whether the app warns the drawer when the balance is close to the cheque amount, because an early warning is cheaper than a bounce, a fee and a lost supplier.

Legal recourse depends on the country, but in most places a bounced cheque is a civil matter first and a criminal matter only when there is intent to defraud. In the United Kingdom, the payee can sue for the debt in the civil courts, and a cheque is strong evidence that the debt exists. In India, a bounced cheque can lead to criminal proceedings under the Negotiable Instruments Act when the drawer fails to pay after a legal notice, which makes the consequences far more serious. In the United States, a bad cheque can lead to civil action and, in some states, criminal charges for repeat offences. A business analyst must know the local law for the market being served, because the return codes, the notice periods and the customer letters all change with the jurisdiction, and the product must support the right process for each country.

Full lesson text (all scenes)

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