We can consider complaints about banks making mistakes when they process payments. This includes wrongly delaying or failing to make a payment, repeating payments, or giving the wrong information about payments. We don’t have the power to set rules about how banks process payments.

Steps

Electronic payments to accounts at the same bank happen straightaway. Those to accounts at other banks take longer and depend on when the payment was set up, the payment type, and when the bank processes the payment. Payments between banks consist of the following steps: 

  • A customer instructs his or her bank (the sending bank) to make a payment.
  • The sending bank checks the customer has enough money in the account for the payment.
  • The sending bank prepares an electronic file, along with other transactions, for the bank whose customer is receiving the payment. This collection of individual transactions is called a "batch". 
  • The sending bank forwards the batch to the Reserve Bank, which transfers the value of the batch between the sending and receiving banks’ accounts at the Reserve Bank. This is called "settlement".
  • Once settlement is complete, the Reserve Bank forwards the batch to the receiving bank. This is called "interchange".
  • The receiving bank credits the payment to its customer’s account.

Timing

Banks used to batch and process payments overnight, but nowadays they do this frequently each business day. This gives customers faster access to deposits made into their accounts. More frequent processing also means banks are likely to take the money for scheduled or future electronic payments earlier in the day.

If such payments aren’t successful the first time because there isn't enough money in an account, a bank may try again later in the day. This could incur a fee, so be sure to check you have enough money available. Also check that your bank does try a second time. Some don't.

Banks generally won’t process payments to accounts at other banks over weekends or on public holidays. Payments made on a non-business day will be processed the next business day.

Also, if you set up a payment late in the day, the bank will generally send your payment the next business day. Banks stop sending payments at a certain time each night so they can update your account and transaction information. Cut-off times depend on the payment type and can vary bank to bank. Check with your bank.

Once you set up and confirm a payment, your bank will take the money from your account and put it into a batch to await processing. This immediately reduces the available balance in your account. If your account pays interest, you will usually continues to earn interest until the batch is sent to the receiving bank for processing to the recipient’s account. The amount of interest may depend on the timing of processing.

Clearing cheques

Cheques, although in declining use, still generate complaints, usually about how long it takes to clear funds. A cheque, once deposited, can take three to five working days to clear, and even longer for overseas cheques. If you deposit a cheque into your account, check with your bank that the money has cleared before you consider it yours.

How cheques are cleared

When you deposit a cheque issued in New Zealand, your bank will credit the cheque amount to your account. This doesn’t mean the money is immediately available for use, so you won’t be able to withdraw it or transfer it to another account straightaway.

On the same day you deposit your cheque, your bank will send the cheque details electronically to the issuing bank, which has until the end of the next working day to decide whether to pay or dishonour the cheque.

If the cheque is honoured, you can access the funds by the end of the next working day. The issuing bank can’t reverse or dishonour the payment after this time.

If the cheque is dishonoured, the amount credited to your account will be reversed. This is why it is important not to consider the funds yours until they have been cleared. Reasons for dishonouring a cheque include that it is stolen or there is not enough money in the account to pay the cheque.

The clearance process for foreign cheques is different and takes longer than three working days.

 

Direct debits

A direct debit gives someone permission to take funds directly from your bank account. A typical example is when you arrange a direct debit with your power or telecommunications company so your monthly bill is automatically paid from your account.

To set up a direct debit, you complete a direct debit authority with the company (known as a direct debit initiator), which allows the company to take payments from your account. The company will tell your bank you have given it authority to pay your bill by direct debit. 

You should be wary of any business that asks you to sign a blank direct debit form or more than one such form. If you do this, the business can submit a new direct debit authority after you have cancelled your existing one.

A direct debit is not the same as an automatic payment, which is an instruction from you to your bank to make a regular payment of a fixed amount from your account to someone else’s, either for a specified period or indefinitely. 

A direct debit allows the direct debit initiator to submit a specific amount to be debited from your account on each occasion. The amount can be different each time, and this is why some people find it a handy way to pay the likes of telephone and power bills, which vary from month to month. 

Lack of funds

Sometimes customers don’t have enough money in an account to pay a direct debit. It is up to the bank to decide whether to allow the payment. A bank may treat it as a request for an overdraft and allow the transaction, or it may dishonour it. As with some other forms of payment, direct debits have to go through the clearance system and can be dishonoured.

Cancelling a direct debit

You can do this at any time, through your bank or the direct debit initiator. The bank must cancel the direct debit when you tell it to do so, but it will also ask you to notify the direct debit initiator. This is a precaution to prevent the initiator unintentionally continuing to send direct debit instructions to your bank.

If you cancel a direct debit authority but keep using the initiator’s services, you will have to pay in some other way. Direct debits are merely a method of collecting payments. Banks are not responsible for the underlying contract between you and the initiator. 

Importantly, if your direct debit is from a credit card, the expiry of that credit card does not necessarily remove the direct debit authority, and you may still be charged. 

Failing to cancel a direct debit

If your bank fails to cancel a direct debit authority and you suffer a direct financial loss as a result, you may be entitled to compensation. This could include a refund for overdraft fees or penalty interest resulting from the unauthorised direct debits. Your bank may also have to credit funds debited without authority, unless you benefitted in some way from the payments (such as if you continued to use power from your power company, in which case you have received a benefit from the direct debit payment, even though it was not authorised).

Foreign cheques

New Zealand banks don't have to accept cheques from overseas, and may not accept them from some countries, so check with your bank before taking a foreign cheque as means of payment. Foreign cheques take longer to process, and don’t go through the New Zealand cheque clearance system.

Clearance

Banks clear foreign currency cheques in one of two ways.

By negotiation

The bank converts the foreign cheque into New Zealand dollars (using that day’s exchange rate) and deposits the money into the customer’s account. In doing so, the New Zealand bank is lending money to the customer while it waits for payment from the overseas bank. The New Zealand bank may allow the customer immediate access to the money, but will reverse the amount if the foreign cheque is dishonoured later by the overseas bank (if, for instance, there isn't enough money in the overseas bank account or the cheque has been stolen).

Alternatively, the New Zealand bank may place a hold on the money for a certain period, meaning the customer cannot access the funds immediately. The hold period allows time for the overseas bank to advise the New Zealand bank whether it will dishonour the cheque. Once the hold period expires, the customer can access the funds. A foreign cheque can still be dishonoured after any hold period ends.

If a cheque is dishonoured, the cheque’s value will be converted back into the foreign currency (using the exchange rate when the bank is advised the cheque is dishonoured) and the amount deducted from the customer’s account. If the exchange rate has changed since the original deposit, the customer’s account may be debited for an amount greater than the original cheque. If dishonouring the cheque causes the customer’s account to be overdrawn, the customer must pay back the bank.

On collection

The second clearance method is for the New Zealand bank to send the cheque to the overseas bank to be processed. When the New Zealand bank receives the money from the overseas bank, it converts the money into New Zealand dollars and deposits the money into the customer’s account.

This method is usually used for higher-value cheques. Banks will also use this method when they are not prepared to advance funds to their customer while they wait for payment from the overseas bank. This may be because the customer does not meet their credit criteria or because the cheque is a personal one.

The on-collection method gives customers certainty of payment and removes exchange risk should the cheque not be paid. This process may also be better when a customer receives a cheque from someone he or she does not know well and wants to be certain the cheque won't be dishonoured later.

Common complaints

The clearance process is a cause of complaints. Customers may not know about the hold period and get concerned about the delay in accessing the money. Customers may also not know that a foreign cheque can be dishonoured after they've accessed the money. And some customers complain about exchange rate changes when a cheque is dishonoured.

A bank’s terms and conditions for accepting foreign cheques should clearly explain that:

  • A cheque can still be dishonoured after the hold period ends
  • The bank can require the customer to repay the cheque amount if that happens.
  • The customer may incur extra costs arising from exchange rate movements.

Banks must give accurate and complete answers to customers' questions about clearance times and the process they adopt when a foreign cheque is dishonoured.

Scams

The most common scam involve people who sell goods online and accept a foreign cheque as payment. The seller will bank the cheque and either send the goods straightaway or wait until the hold period ends, thinking the cheque has cleared. The cheque is subsequently dishonoured and the seller’s bank debits his or her account to cover the cheque amount. If the customer has insufficient credit funds in the account, the account will be overdrawn.