In the past, bills and checks were physically exchanged by the employees of financial institutions by gathering at clearing houses. With recent IT developments, however, the paper check is being increasingly removed from this processing flow. Instead, the information of the checks are sent to the paying institutes. This process is called truncation. Currently, truncation is used for clearing cashier's checks and will in the near future also be used for promissory notes, current account checks and household checks. After bills and checks are deposited, funds can usually be withdrawn at or after 2:20 p.m. on the following business day.
Financial institutions that receive cashier's checks collect the information of the check after their business hours on the same day and send the data to the bank that issued the check via clearing houses through the network. As a more innovative method, real-time processing was introduced in August 2004 to send the information of fixed-sum cashier's checks via a device and exchange the data with the issuing bank in real-time. Customers who want immediate cash withdrawal can use this service with commission.
A local letter of credit (L/C) is issued by banks offering foreign exchange services upon requests by exporters who received an export letter of credit, a construction or service export contract denominated in a foreign currency, or have a history of exporting goods. The L/C is a pledge to pay the domestic goods suppliers, with the master L/C from overseas action as collateral.
The process of local L/C clearing is as follows: financial institutions exchange drafts (or requests for payment collection) issued against local L/Cs in a clearing house, and after truncation the fund can be withdrawn on the 3rd business day (including the exchange date). Requests of purchasing fund collection are transferred and exchanged via the Trade Information Network using the electronic data interchange (EDI) method.
Corporate purchasing fund bills are a payment method used between companies. The seller issues a bill exchange or a request for purchasing fund collection, with the buyer designated as the recipient. Once collection is requested through the remitting bank, the buyer makes payment for the bill on the due date by taking out a loan within a pre-set loan limit.
KFTC established and operates a truncation system for funds settlement of these bills to eliminate the physical exchange of bills.
An electronic bond is issued by a purchasing company, designation a selling company as the creditor. It carries no risk of loss or fraud like bills, checks and other paper-based payment methods and eliminates the face-to-face confrontation of the issuer and the holder, allowing the whole process of issuing and setting bonds, notifying bond transfers and taking out loans secured against bonds online.
Dishonor of a bill or check loosely means that a bill or check legitimately presented at a bank is not payable due to denial reasons, for example, lack of sufficient funds in the drawer's account to cover the amount or non-existence of the drawer's account.
Dishonored bills and checks are reported to clearing houses by paying institutes and the clearing houses manage the issuers of dishonored bills. In addition, some of those deemed to be dishonored bill or check issuers according to the Check Clearing Business Agreement are prohibited from engaging in current deposit transactions for two years.
