What is a banking system? It feels like a very simple question. However, depending on where you sit and your personal perspective there may be a number of different answers.
When I present this question to participants on my courses I always receive a response that deals exclusively using a computerized process. In today's jargon the word "system" appears to automatically consult with a computer and a computer just.
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However a "system" is larger than only a computer. A "system" is a group or combination of things or parts forming a complex or unitary whole. An easily understood example is that the postal system including things like stamps, letters, parcels, letter boxes, post offices, sorting offices, servers, clerks, mailmen, delivery vans, airlines; only to mention some of its components. It is how all this is organised and designed to work that makes it worthy of the title "postal system". So, when we speak of a system, we speak of something much larger and more complicated than the computerized portion of that program.
Exactly the same logic relates to some other "system" and "banking systems" are not any different.
The cheque clearing system (or check clearing system to our American cousins) can probably lay claim to the honor of being the oldest banking system on earth. This system, with variations, is used for this very day in all states where the cheque still forms a part of the national payment system.
Now in the twenty first century, in the majority of countries where the cheque is still in use, the cheque clearing process is an extremely complicated process using state of the art technology, readers, sorters, scanners, coded cheques, digital images and lots and lots of computing power.
The cheque is basically a humble piece of paper, an instruction to a bank to make a payment. The story of the cheque clearing process is a narrative that's worth telling. It is that story of a banking system that is now in its third century of performance. It's the narrative of a banking system which has evolved and changed and been improved through countless changes and creations. It is a narrative of the key payment tool that has helped grease the wheels of trade and industry.
How did the cheque start? Most likely in early times. There is discussion of cheque-like instruments from the Roman empire, from India and Persia, dating back two millennia or longer.
The cheque is a written order addressed by an account holder, the "drawer", to his or her bank, to pay a particular sum to the payee (also called the "drawee"). The cheque is a payment instrument, meaning that it's the true vehicle by which a payment could be obtained from 1 account and moved to another account. A cheque has a legal personality - it's a negotiable instrument regulated in most countries by law.
To illustrate let us use an example. Your Aunt Sally gives you a present for the birthday. A cheque for a hundred pounds. To get a grasp of your real present (the money that is) you have two options. You may take yourself off to Aunt Sally's lender and claim payment in cash by introducing the cheque there yourself, or you might give the cheque to your own bank and ask them to accumulate the exact amount on your behalf.
Collecting your gift in person may be real bind, particularly if Aunt Sally lives in another city, miles away from wherever you live. So you deposit your cheque with your bankcard.
Cheque clearing is your process (or system) that can be used to find the cheque that Aunt Sally gave you for your birthday, from your bank branch, where you deposited it, to Aunt Sally's bank branch and to find settlement for the amount due back to your own branch. Given that on any one day millions and millions of cheques are processed, sorted, processed, transported; obtaining payment for and keeping tabs on all of these things is not a simple feat.
A couple of years ago the annual amount of cheques processed in the United Kingdom was just over five million. Not per year but PER DAY!
However, we're digressing. We need to get back to our story, now unfolding nearly two and a half centuries ago. Until roughly 1770 the collection of cheques in London, which by then had already become the world's premier banking centre, was pretty much a informal, tedious affair. Each afternoon clerks from each of the dozens of London banks could set out using a leather bag tucked under their arms. From the bags were the cheques which was deposited with their banks attracted on all the other London banks.
They would trudge from 1 bank to another, through rain and through sand, in winter and summer. At every bank they'd present the cheques that had been deposited together for set and would get in trade cash payment for those items presented. When necessary they would also take delivery of cheques drawn independently and deposited in these other banks, keeping a tally of accounts between them and another lender until they settled with every other. This dreary exhausting trudge from 1 bank to another would frequently take the best part of every afternoon. On their return the money received in payment of those cheques would be balanced up. Life was indeed hard.
And then it occurred! A spark of invention flashed across the mind of a few of these weary clerks. Who it was, is not known, however he had a true brainwave, likely driven by thoughts of the way to boost his leisure time or settle his nerves using this additional pint of ale.
The logic was simple. When the clerks could all meet at a set time at a single place, they could transact their business, each with the other in a portion of the time and without the need to walk miles and miles to heaps of banks. They began doing this by organizing to meet daily at the Five Bells, a tavern in Lombard Street in the City of London, to swap all their cheques in 1 place and settle the accounts in money. In the soul of the efficiency gained they can maximise their leisure and drinking time - which they immediately did, much to the gratification of the local publican. An additional benefit was that all this now happened out of the cold and the wet and the gloom.