What Is an Exception Item?
An exception item is a banking term used to describe a check or other payment that cannot be processed or which is interrupted. Reasons for this obstacle may include the fact that a stop payment order has been made, a customer's account has been closed, there are insufficient funds in the payor's account, or the check is incomplete or missing a signature.
Notably, an exception item should not be confused with the accounting term "exceptional item," which is an infrequent charge incurred by a company that must be noted separately in its financial reporting.
Key Takeaways
- An exception item, in banking, refers to a transaction that is unable to be fully processed.
- Hold-ups can include simple mistakes like a typo or missing signature, to more structural problems like a stop payment or bounced check.
- Once a tedious back-office process, software and automation have made identifying and rectifying exception items far quicker and efficient.
Exception Items Explained
As noted above, particular reasons for exception items include stop payments (a request on the part of the account holder to cancel a check or payment that has not yet been processed.), a closed account, or a check not being fully filled out. A bounced check, for example, is an example of an exception item for a check that cannot be processed because the account holder hasnonsufficient funds(NSF) available for use.
Banks return, or "bounce," these checks, also known asrubber checks, rather than honoring them, and banks may subsequently charge the check writers NSF fees.
In recent years, computer software programs have been developed to help bank personnel spot and resolve exception items in a more efficient manner.
Exception Items and Stop Payments
To request a stop payment, an account holder provides specific information (e.g., the check number, payable to, date, etc.) to the bank. This information is for a check in-progress that the payer wishes to pause or cancel. The bank then flags the check and prevents it from clearing. Some banks offer account holders the chance to extend or refresh the stop payment, via a verbal or written request. This is particularly useful if the bank cannot locate the specific check. If the bank cannot find the check after a period of six months, the stop payment will generally expire.
Issuing stop payments generally costs the account holder a small fee of about $30 (although bank policies differ in this regard). An account holder can issue a stop payment for many reasons, including sending a check for an incorrect amount, or canceling a purchase after having put the check in the mail. Only on some occasions will a financial institution not be able to honor a stop payment.
Example of Automated Handling of Exception Items
Many companies now automate the process of handling exception items. For example, the company Blackline offers a comprehensive “Finance Controls and Automation platform,” delivered securely via the cloud. The software allows organizations to streamline the entire accounting and finance lifecycle in a centralized and secure manner.
In addition, the company Digital Check has developed its own “Special Document Handling (SDH),”a specific process for streamlining recurring exception items. SDH identifies exception items via their routing/transit number (as well as their domestic account number or IBAN number). Digital Check then applies special thresholdsettings, which helps the image pass quality analysis tests. This involves removing the background image from the check while retaining the important information (e.g., to whom the item is writtenand the signature).
