Cheque
Encyclopedia
A cheque is a document/instrument (usually a piece of paper)See the negotiable cow
—itself a fictional story—for discussions of cheques written on unusual surfaces. that orders a payment of money from a bank account. The person writing the cheque, the drawer, usually has a current account (British and HK), or checking account (US), or chequing account (CAN) where their money was previously deposited. The drawer writes the various details including the money amount, date, and a payee on the cheque, and signs it, ordering their bank
, known as the drawee, to pay that person or company the amount of money stated.
Cheques are a type of bill of exchange and were developed as a way to make payments without the need to carry large amounts of gold
and silver
. While paper money
evolved from promissory notes
, another form of negotiable instrument, similar to cheques in that they were originally a written order to pay the given amount to whomever had it in their possession (the "bearer
").
Technically, a cheque is a negotiable instrument
Although cheques are regulated in most countries as negotiable instruments, in many countries they are not actually negotiable, viz., the payee cannot endorse the cheque in favour of a third party. Payers could usually designate a cheque as being payable to a named payee only by "crossing" the cheque, thereby designating it as account payee only, but in an effort to combat financial crime, many countries have provided by a combination of law and regulation that all cheques should be treated as crossed, or account payee only, and are not negotiable. instructing a financial institution
to pay a specific amount of a specific currency
from a specified transactional account held in the drawer's name with that institution. Both the drawer and payee may be natural person
s or legal entities. Specifically, cheques are order instruments, and are not in general payable simply to the bearer (as bearer instrument
s are) but must be paid to the payee. In some countries, such as the US, the payee may endorse the cheque, allowing them to specify a third party to whom it should be paid.
Although cheques have been in use since at least the 9th century, it was during the 20th century that cheques became a highly popular non-cash
method for making payment
s and the usage of cheques peaked. By the second half of the 20th century, as cheque processing became automated, billions of cheques were issued annually; these volumes peaked in or around the early 1990s. Since then cheque usage has fallen, being partly replaced by electronic payment systems. In some countries cheques have become a marginal payment system
or have been phased out completely.
and Ireland, while check is used only for other meanings, thus distinguishing the two definitions in writing.
In American English
, the usual spelling for both is check.
In India, during the Mauryan period (from 321 to 185 BC), a commercial instrument called adesha was in use, which was an order on a banker desiring him to pay the money of the note to a third person, which corresponds to the definition of a bill of exchange as we understand it today. During the Buddhist period, there was considerable use of these instruments. Merchants in large towns gave letters of credit to one another. There are also numerous references to promissory notes.
During the 3rd century AD, banks in Persia
and other territories in the Persian Sassanid Empire
issued letters of credit
known as chak (In New Persian script: چک. In Shahnameh
there are several mentions of use of chak and in post-Islamic Arabic document this word appears as Arabicised ṣakk or صکّ).
Muslim traders are known to have used the cheque or ṣakk system since the time of Harun al-Rashid
(9th century) of the Abbasid Caliphate.
Between 1118 and 1307, it is believed the Knights Templar
introduced a cheque system for pilgrims travelling to the Holy Land
or across Europe. Pilgrims would deposit funds at one chapter house, then withdraw them from another chapter at their destination by showing a draft of their claim. These drafts were written in a complex code only the Templars could decipher.
In the 13th century in Venice
the bill of exchange was developed as a legal device to allow international trade without the need to carry large amounts of gold
and silver
. Their use subsequently spread to other European countries.
In the early 1500s in the Dutch Republic
, to protect large accumulations of cash, people began depositing their money with "cashiers". These cashiers held the money for a fee. Competition drove cashiers to offer additional services including paying money to any person bearing a written order from a depositor to do so. They kept the note as proof of payment. This concepts went on and spread to England and elsewhere.
s and bankers based in the City of London
, and dated 16 February 1659.
In 1717, the Bank of England
pioneered the first use of a pre-printed form. These forms were printed on "cheque paper" to prevent fraud, and customers had to attend in person and obtain a numbered form from the cashier. Once written, the cheque was brought back to the bank for settlement.
Until about 1770, an informal exchange of cheques took place between London banks. Clerks of each bank visited all the other banks to exchange cheques, whilst keeping a tally of balances between them until they settled with each other. Daily cheque clearing
began around 1770 when the bank clerks met at the Five Bells, a tavern in Lombard Street
in the City of London, to exchange all their cheques in one place and settle the balances in cash. See bankers' clearing house
for further historical developments.
In 1811, the Commercial Bank of Scotland
, it is thought, was the first bank to personalise its customers' cheques, by printing the name of the account holder vertically along the left-hand edge. In 1830 the Bank of England
introduced books of 50, 100, and 200 forms and counterparts, bound or stitched. These cheque books became a common format for the distribution of cheques to bank customers.
In the late 19th century, several countries formalised laws regarding cheques. The UK passed the Bills of Exchange Act in 1882, and India passed the Negotiable Instruments Act (NI Act) 1881; which both covered cheques.
In 1931 an attempt was made to simplify the international use of cheques by the Geneva Convention on the Unification of the Law Relating to Cheques. Many European and South American states as well as Japan joined the convention. Some countries, including the U.S. and members of the British Commonwealth
, did not participate.
In 1959 a standard for machine-readable characters (MICR) was agreed and patented in the U.S. for use with cheques. This opened the way for the first automated reader/sorting machines for clearing cheques. As automation increased, the following years saw a dramatic change in the way in which cheques were handled and processed. Cheque volumes continued to grow; in the late 20th century, cheques were the most popular non-cash
method for making payments, with billions of them processed each year. Most countries saw cheque volumes peak in the late 1980s or early 1990s, after which electronic payment methods became more popular and the use of cheques declined.
In 1969 cheque guarantee card
s were introduced in several countries, allowing a retailer to confirm that a cheque would be honoured when used at a point of sale
. The drawer would sign the cheque in front of the retailer, who would compare the signature to the signature on the card and then write the cheque-guarantee-card number on the back of the cheque. Such cards were generally phased out and replaced by debit cards, starting in the mid 1990s.
From the mid 1990s, many countries enacted laws to allow for cheque truncation
, in which a physical cheque is converted into electronic form for transmission to the paying bank or clearing-house. This eliminates the cumbersome physical presentation and saves time and processing costs.
In 2002, Germany and some other European countries phased out the use of cheques altogether when the Eurocheque
system, which they had used as their domestic cheque-clearing system, ceased on 1 January 2002. As of 2010, many countries have either phased out the use of cheques altogether or signaled that they would do so in the future.
As cheque usage increased during the 19th and 20th centuries additional items were added to increase security or to make processing easier for the bank or financial institution. A signature of the drawer was required to authorise the cheque and this is the main way to authenticate the cheque. Second it became customary to write the amount in words as well as in numbers to avoid mistakes and make it harder to fraudulently alter the amount after the cheque had been written. It is not a legal requirement to write down the amount in words, although some banks will refuse to accept cheques that do not have the amount in both numbers and words.
An issue date was added, and cheques may not be valid a certain amount of time after issue. In the US and Canada a cheque is typically valid for six months after the date of issue, after which it is a stale-dated cheque, but this depends on where the cheque is drawn; in Australia this is typically fifteen months. A cheque that has an issue date in the future, a post-dated cheque, may not be able to be presented until that date has passed, writing a post dated cheque may simply be ignored or is illegal in some countries. Conversely, an antedated cheque has an issue date in the past.
A cheque number was added and cheque books were issued so that cheque numbers were sequential. This allowed for some basic fraud detection by banks and made sure one cheque was not presented twice.
In some countries such as the US, cheques contain a memo line where the purpose of the cheque can be indicated as a convenience without affecting the official parts of the cheque. In the United Kingdom this is not available and such notes are sometimes written on the reverse side of the cheque.
In the US, at the top (when cheque oriented vertically) of the reverse side of the cheque, there are usually one or more blank lines labelled something like "Endorse here".
Starting in the 1960s machine readable routing and account information was added to the bottom of cheques in MICR format. This allowed automated sorting and routing of cheques between banks and led to automated central clearing facilities. The information provided at the bottom of the cheque is country specific and is driven by each country's cheque clearing system. This meant that the payee no longer had to go to the bank that issued the cheque, instead they could deposit it at their own bank or any other banks and the cheque would be routed back to the originating bank and funds transferred to their own bank account.
For additional protection, a cheque can be crossed
so that funds must be paid into a bank account in the name of the payee. The format and wording varies from country to country, but generally two parallel lines and/or the words 'Account Payee' or similar may be placed either vertically across the cheque or in the top left hand corner. In addition the words 'or bearer' must be not be used or crossed out on the payee line.
When a cheque is mailed, a separate letter or "remittance advice
" may be attached to inform the recipient of the purpose of the cheque – formally, which account receivable to credit the funds to. This is frequently done formally using a provided slip when paying a bill, or informally via a letter when sending an ad hoc cheque.
of a brokerage account, the payee will be the custodian, but the cheque may be marked "F/B/O" ("for the benefit of") the beneficiary.
Ultimately, there is also at least one endorsee which would typically be the financial institution servicing the payee's account, or in some circumstances may be a third party to whom the payee owes or wishes to give money.
A payee that accepts a cheque will typically deposit
it in an account at the payee's bank, and have the bank process the cheque. In some cases, the payee will take the cheque to a branch of the drawee bank, and cash the cheque there. If a cheque is refused at the drawee bank (or the drawee bank returns the cheque to the bank that it was deposited at) because there are insufficient funds for the cheque to clear, it is said that the cheque has bounced
. Once a cheque is approved and all appropriate accounts involved have been credited, the cheque is stamped with some kind of cancellation mark, such as a "paid" stamp. The cheque is now a cancelled cheque. Cancelled cheques are placed in the account holder's file. The account holder can request a copy of a cancelled cheque as proof of a payment. This is known as the cheque clearing cycle.
Cheques can be lost or go astray within the cycle, or be delayed if further verification is needed in the case of suspected fraud. A cheque may thus bounce some time after it has been deposited.
Following concerns about the amount of time it took banks to clear cheques, the United Kingdom Office of Fair Trading
set up a working group in 2006 to look at the cheque clearing cycle. Their report acknowledged that clearing times could be improved, but that the costs associated with speeding up the cheque clearing cycle could not be justified considering the use of cheques was declining. However, they concluded the biggest problem was the unlimited time a bank could take to dishonor a cheque. To address this, changes were implemented so that the maximum time after a cheque was deposited that it could be dishonoured was six days, what was known as the "certainty of fate" principle; see Cheque and Credit Clearing Company
and "2-4-6".
An advantage to the drawer of using cheques instead of debit card
transactions, is that they know the drawer's bank will not release the money until several days later. Paying with a cheque and making a deposit before it clears the drawer's bank is called "kiting
" or "floating" and is generally illegal in the US, but rarely enforced unless the drawer uses multiple chequing accounts with multiple institutions to increase the delay or to steal the funds.
transactions (for which credit card
s and debit card
s are increasingly preferred) and for third party payments (for example, bill payments), where the decline has been accelerated by the emergence of telephone banking and online banking
. Being paper-based, cheques are costly for banks to process in comparison to electronic payments, so banks in many countries now discourage the use of cheques, either by charging for cheques or by making the alternatives more attractive to customers. Cheques are also more costly for the issuer and receiver of a cheque. In particular the handling of money transfer requires more effort and is time consuming. The cheque has to be handed over on a personal meeting or has to be sent by mail. The rise of automated teller machine
s (ATMs) means that small amounts of cash are often easily accessible, so that it is sometimes unnecessary to write a cheque for such amounts instead.
there are number of other payment system
s that have emerged to compete against cheques;
. Even before the introduction of online banking, it has been possible in some countries to make payments to third parties using ATMs
, which may accurately and rapidly capture invoice amounts, due dates, and payee bank details via a bar code reader to reduce keying. In some countries, entering the bank account number results in the bank revealing the name of the payee as an added safeguard against fraud. In using a cheque, the onus is on the payee to initiate the payment, whereas with a giro transfer, the onus is on the payer to effect the payment. The process is also procedurally more simple, as no cheques are ever posted, can claim to have been posted, or need banking or clearance.
In Germany, Austria, the Netherlands, Belgium, and Scandinavia, cheques have almost completely vanished in favour of direct bank transfers and electronic payments. Direct bank transfers, using so-called giro transfers, have been standard procedure since the 1950s to send and receive regular payments like rent and wages and even mail-order invoices. In the Netherlands, Austria, and Germany, all kinds of invoices are commonly accompanied by so-called acceptgiro's (Netherlands) or Überweisungen (German), which are essentially standardised bank transfer order forms preprinted with the payee's account details and the amount payable. The payer fills in his account details and hands the form to a clerk at his bank, which will then transfer the money. It is also very common to allow the payee to automatically withdraw the requested amount from the payer's account (Lastschrifteinzug (German) or Incasso (machtiging) (Netherlands)). Though similar to paying by cheque, the payee only needs the payer's bank and account number. Since the early 1990s, this method of payment has also been available to merchants. Due to this, credit cards are rather uncommon in Germany and Austria, and are mostly used to give access to credit rather than as a payment mechanism. However, debit cards are widespread in these countries, since virtually all Austrian and German banks issue debit cards instead of simple ATM card
s for use on current accounts. Acceptance of cheques has been further diminished since the late 1990s, because of the abolition of the Eurocheque
. Cashing a foreign bank cheque is possible, but usually very expensive.
In Finland, banks stopped issuing personal cheques in about 1993 in favour of giro systems, which are now almost exclusively electronically initiated either via internet banking or payment machines located at banks and shopping malls. All Nordic countries
have used an interconnected international giro system since the 1950s, and in Sweden, cheques are now totally abandoned. Electronic payments across the European Union are now fast and inexpensive—usually free for consumers.
In Poland cheques were withdrawn from use in 2006, mainly because of lack of popularity due to the widespread adoption of credit
and debit card
s.
In the United Kingdom, Ireland, and France, some people still use cheques, partly because cheques remain free of charge to personal customers; however, bank-to-bank transfers are increasing in popularity. Since 2001, businesses in the United Kingdom have made more electronic payments than cheque payments. Most utilities in the United Kingdom charge lower prices to customers who pay by direct debit
than for other payment methods, including electronic methods. The vast majority of retailers in the United Kingdom and many in France no longer accept cheques as a means of payment. For example Shell
announced in September 2005 that it would no longer accept cheques in its UK petrol stations. More recently, this has been followed by other major fuel retailers, such as Texaco
, BP
, and Total
. Asda
announced in April 2006 that it would stop accepting cheques, initially as a trial in the London area, and Boots announced in September 2006 that it would stop accepting cheques, initially as a trial in Sussex
and Surrey
. Currys
(and other stores in the DSGi group
) and WH Smith also no longer accept cheques. Cheques are now widely predicted to become a thing of the past, or at most, a niche product used to pay private individuals or for the very large number of small service providers who are not used to providing their bank details to customers to allow electronic payments to be made to them, and/or do not wish to be burdened with checking their bank account frequently and reconciling their contents with amounts due (for example, music teachers, driving instructors, children's sports lessons, small shops, schools). The UK Payments Council
announced in December 2009 that cheques would be phased out by October 2018, but only if adequate alternatives are developed. They intended to perform annual checks on the progress of other payments systems and a final review of the decision would have been held in 2016. Concerns were expressed, however, by charities and older people, who are still heavy users of cheques, and replacement plans have been criticised as open to fraud. However it was announced by the UK Payment's Council in July 2011 that the cheque will not be eliminated as a paper-initiated payment.
at all. When sending a payment by online banking in the US at some banks, the sending bank mails a cheque to the payee's bank or to the payee rather than sending the funds electronically. Certain companies whom a person pays with a cheque will turn it into an Automated Clearing House
(ACH) or electronic transaction. Banks try to save time processing cheques by sending them electronically between banks. Cheque clearing is usually done through an electronic cheque broker, or the Federal Reserve Banks. Copies of the cheques are stored at a bank or the broker, for periods up to 99 years, and this is why some cheque archives have grown to 20 petabytes. The access to these archives is now world wide, as most bank programming is now done offshore. Many utilities and most credit cards will also allow customers to pay by providing bank information and having the payee draw payment from the customer's account (direct debit
). Many people in the US still use paper money order
s to pay bills or transfer money which is a unique type of cheque. They have security advantages over mailing cash, and do not require access to a bank account.
Canada's usage of cheques is slightly less than that of the US. The Interac
system, which allows instant fund transfers via chip
or magnetic strip and PIN
, is widely used by merchants to the point that few brick and mortar merchants accept cheques. Many merchants accept Interac debit payments but not credit card payments, even though most Interac terminals can support credit card payments. Financial institutions also facilitate transfers between accounts within different institutions with the Email Money Transfer
(EMT) service.
Cheques are still widely used for government cheques, payroll, rent, and utility bill payments, though direct deposit
s and online/telephone bill payments are also widely offered.
being used for the majority of payments. Where cheques were used they have been declining rapidly, by 2009 there was negligible consumer cheque usage in Japan, South Korea and Taiwan
. This declining trend was accelerated by these developed markets advanced financial services infrastructure. Many of the developing markets have seen an increasing use of electronic payment systems, 'leap-frogging' the less efficient chequing system altogether.
India had a long tradition of using cheques, it passed laws to formalise cheque usage in 1881, and was one of the Asian countries that did had significant cheque usage. As of 2009 there was wide usage of cheques as payment method in trade, and also by individuals as preferred option to pay other individuals or to pay utility bills. One of the reasons was that banks usually provided cheques for free to their individual account holders. However cheques are now rarely accepted at point of sale
in retail stores where cash and cards
are payment methods of choice. Electronic payment transfer continued to gain popularity in India and like other countries this has caused a subsequent reduction in volumes of cheques issued each year.
As in other countries, New Zealand payment statistics indicate a strong move away from cheques in favour of electronic payment methods. From being the most popular form of non-cash payment until the mid-1990s, cheques now lag far behind EFTPOS
payment transactions and electronic credits. Their usage is declining at about 6% per year. In 1993, cheque payments accounted for over 50% of transactions through the banking system with an averaged 130 cheques per capita. By the end of 2006, this had dropped to 9% with 41 cheques per capita.
and banker's draft
s also known as a bank cheque or treasurer's cheque, are cheques issued against the funds of a financial institution rather than an individual account holder. Typically, the term cashier's cheques are used in the US and banker's drafts are used in the UK. The mechanism differs slightly from country to country but in general the bank issuing the cashiers cheque or bankers draft will allocate the funds at the point the cheque is drawn. This provides a guarantee, save for a failure of the bank, that it will be honoured. Cashier's cheques are perceived to be as good as cash but they are still a cheque, a misconception often exploited by scam artists. A lost or stolen cheque can still be stopped like any other cheque, so payment is not completely guaranteed.
is drawn, the bank operating the account verifies there are currently sufficient funds in the drawer's account to honour the cheque. Those funds are then set aside in the bank's internal account until the cheque is cashed or returned by the payee. Thus, a certified cheque cannot "bounce", and its liquidity is similar to cash, absent failure of the bank. The bank indicates this fact by making a notation on the face of the cheque (technically called an acceptance).
.
. A cheque differs from a warrant in that the warrant is not necessarily payable on demand and may not be negotiable. They are often issued by government entities such as the military to pay wages or suppliers. In this case they are an instruction to the entity's treasurer department to pay the warrant holder on demand or after a specified maturity date.
or debit card
s has begun to replace the traveller's cheque as the standard for vacation money due to their convenience and additional security for the retailer. This has resulted in many businesses no longer accepting traveller's cheques.
or merchant such as a grocery for payment by a third party for a customer is referred to as a money order
or postal order
. These are paid for in advance when the order is drawn and are guaranteed by the institution that issues them and can only be paid to the named third party. This was a common way to send low value payments to third parties, avoiding the risks associated with sending cash via the mail, prior to the advent of electronic payment methods.
Oversized cheques are often used in public events such as donating money to charity or giving out prizes such as Publishers Clearing House
. The cheques are commonly 18 by 36 in (45.7 by 91.4 cm) in size, however, according to the Guinness Book of World Records
, the largest ever is 12 by 25 m (39.4 by 82 ). Regardless of the size, such cheques can still be redeemed for their cash value as long as they have the same parts as a normal cheque, although usually the oversized cheque is kept as a souvenir and a normal cheque is provided. A bank may levy additional charges for clearing an oversized cheque.
, or Aid to Families with Dependent Children
make vouchers available to their beneficiaries, which are good up to a certain monetary amount for purchase of grocery items deemed eligible under the particular programme. The voucher can be deposited like any other cheque by a participating supermarket
or other approved business.
(APCA).
In 1999, banks adopted a system to allow faster clearance of cheques by electronically transmitting information about cheques, this brought clearance times down from five to three days. Prior to that cheques had to be physically transported to the paying bank before processing began. If it was dishonoured, it was physically returned.
All licensed banks in Australia may issue cheques in their own name. Non-banks are not permitted to issue cheques in their own name but may issue, and have drawn on them, payment orders (which functionally are no different from cheques).
(CPA)
In 1881, the Negotiable Instruments Act (NI Act) was enacted in India, formalising the usage and characteristics of instruments like the cheque the bill of exchange and promissory note. The NI Act provided a legal framework for non-cash paper payment instruments in India.
In 1938, the Calcutta Clearing Banks' Association, which was the largest bankers' association at that time, adopted clearing house.
and imaging. Truncation allows for the transmission of an electronic image of all or part of the cheque to the paying bank’s branch, instead of the cumbersome physical presentment. This reduced the total cheque clearance time, as well as eliminating the costs of physically moving the cheque.
The registered banks under supervision of Reserve Bank of New Zealand
provide the cheque payment services. Once banked, cheques are processed electronically together with other retail payment instrument.
(C&CCC) Standard 3", the industry standard detailing layout and font, be printed on a specific weight of paper (CBS1), and contain explicitly defined security features.
Since 1995, all cheque printers must be members of the Cheque Printer Accreditation Scheme (CPAS). The scheme is managed by the Cheque and Credit Clearing Company and requires that all cheques for use in the British clearing process are produced by accredited printers who have adopted stringent security standards.
The rules concerning crossed cheques are set out in Section 1 of the Cheques Act 1992 and prevent cheques being
cashed by or paid into the accounts of third parties. On a crossed cheque the words “account payee only” (or similar)
are printed between two parallel vertical lines in the centre of the cheque. This makes the cheque non-transferable and is to avoid cheques being endorsed and paid into an account other than that of the named payee. Crossing cheques
basically ensures that the money is paid into an account of the intended beneficiary of the cheque.
Following concerns about the amount of time it took banks to clear cheques, the United Kingdom Office of Fair Trading
set up a working group in 2006 to look at the cheque clearing cycle. They produced a report recommending maximum times for the cheque clearing which were introduced in UK from November 2007. In the report the date the credit appeared on the recipient's account (usually the day of deposit) was designated "T". At "T + 2" (two business days afterwards) the value would count for calculation of credit interest or overdraft interest on the recipient's account. At "T + 4" clients would be able to withdraw funds (though this will often happen earlier, at the bank's discretion). "T + 6" is the last day that a cheque can bounce without the recipient's permission—this is known as "certainty of fate". Before the introduction of this standard, the only way to know the "fate" of a cheque has been "Special Presentation", which would normally involve a fee, where the drawee bank contacts the payee bank to see if the payee has that money at that time. "Special Presentation" needed to be stated at the time of depositing in the cheque.
Cheque volumes peaked in 1990 when four billion cheque payments were made. Of these, 2.5 billion were cleared through the inter-bank clearing managed by the C&CCC, the remaining 1.5 billion being in-house cheques which were either paid into the branch on which they were drawn or processed intra-bank without going through the clearings. As volumes started to fall, the challenges faced by the clearing banks were then of a different nature: how to benefit from technology improvements in a declining business environment.
Although the UK did not adopt the euro as its national currency when other European countries did in 1999, many banks began offering euro denominated accounts with chequebooks, principally to business customers. The cheques can be used to pay for certain goods and services in the UK. The same year, the C&CCC set up the euro cheque clearing system to process euro denominated cheques separately from sterling cheques in Great Britain.
The UK Payments Council
from 30 June 2011 withdrew the existing Cheque Guarantee Card Scheme in the UK. This service allowed cheques to be guaranteed at point of sales up to a certain value, normally £50 or £100, when signed in front of the retailer with the additional cheque guarantee card. This was after a long period of decline in their use in favour of debit cards.
The Payments Council proposed to withdraw the use of cheques altogether in the UK and had set a target date for this of 31 October 2018. However, on 12 July 2011, the Payments Council announced that after opposition from MPs, charity groups and public opinion, the cheque will remain in use and there would no longer be a reason to seek an alternative paper-initiated payment.
, under the rubric of negotiable instrument
s.
In the US, the terminology for a cheque historically varied with the type of financial institution on which it is drawn. In the case of a savings and loan association
it was a negotiable order of withdrawal (compare Negotiable Order of Withdrawal account
); if a credit union
it was a share draft. Checks were associated with chartered commercial banks. However, common usage has increasingly conformed to more recent versions of Article 3, where check means any or all of these negotiable instruments. Certain types of cheques drawn on a government agency, especially payroll cheques, may be called a payroll warrant.
At the bottom of each cheque there is the routing / account number in MICR format. The routing transit number
is a nine-digit number in which the first four digits identifies the US Federal Reserve Bank's cheque-processing center. This is followed by digits 5 through 8, identifying the specific bank served by that cheque-processing center. Digit 9 is a verification check digit
, computed using a complex algorithm of the previous eight digits.
A draft is a bill of exchange which is not payable on demand of the payee. (However, draft in the US Uniform Commercial Code
today means any bill of exchange, whether payable on demand or at a later date; if payable on demand it is a "demand draft
", or if drawn on a financial institution, a cheque.)
Cheque truncation
was introduced in 2004 with the passing of the "Check Clearing for the 21st Century Act" (or Check 21 Act
), this allowed the creation of electronic substitute check
s to replace the physical cheques, reducing cost and processing time.
However, if the incident repeats, the person is then directly sentenced to imprisonment from 1 to 5 years. (linking related: Victims of Cheque (Çek Mağdurları): protest the actions of civil society organizations. )
method and not knowing if funds will be received until the clearing cycle to complete, have made them vulnerable to a number of different types of fraud;
is the method of choice in defrauding a bank. One form of forgery involves the use of a victim's legitimate cheques, that have either been stolen and then cashed, or altering a cheque that has been legitimately written to the perpetrator, by adding words and/or digits to inflate the amount.
, specifically identity theft
. In the US and Canada until recent years the social security number
was sometimes included on cheques. The practice was discontinued as identity theft became widespread.
) cheque. Cheques are usually dishonoured because the drawer's account has been frozen or limited, or because there are insufficient funds in the drawer's account when the cheque was redeemed. A cheque drawn on an account with insufficient funds is said to have bounced and may be called a rubber cheque. Banks will typically charge customers for issuing a dishonoured cheque, and in some jurisdictions such an act is a criminal action. A drawer may also issue a stop on a cheque, instructing the financial institution not to honour a particular cheque.
In England and Wales
, they are typically returned marked "Refer to Drawer"—an instruction to contact the person issuing the cheque for an explanation as to why the cheque was not honoured. This wording was brought in after a bank was successfully sued for libel after returning a cheque with the phrase "Insufficient Funds" after making an error—the court ruled that as there were sufficient funds the statement was demonstrably false and damaging to the reputation of the person issuing the cheque. Despite the use of this revised phrase, successful libel lawsuits brought against banks by individuals remained for similar errors.
In Scotland, a cheque acts as an assignment of the amount of money to the payee. As such, if a cheque is dishonoured in Scotland, what funds are present in the bank account are "attached" and frozen, until either sufficient funds are credited to the account to pay the cheque, the drawer recovers the cheque and hands it into the bank, or the drawer obtains a letter from the payee that he has no further interest in the cheque.
A cheque may also be dishonored because it is stale or not cashed within a "void after date". Many cheques have an explicit notice printed on the cheque that it is void after some period of days. In the US, banks are not required by the Uniform Commercial Code
to honour a , which is a cheque presented six months after it is dated.
" at the post office. There a bank will pick up all the mail, sort it, open it, take the cheques and remittance advice
out, process it all through electronic machinery, and post the funds to the proper accounts. In modern systems, taking advantage of the Check 21 Act
, as in the US, many cheques are transformed into electronic objects and the paper is destroyed.
Negotiable cow
Board of Inland Revenue v Haddock is a fictitious legal case written by the humorist A. P. Herbert for Punch magazine as part of his series of Misleading Cases in the Common Law. It was first published in book form in More Misleading Cases in the Common Law...
—itself a fictional story—for discussions of cheques written on unusual surfaces. that orders a payment of money from a bank account. The person writing the cheque, the drawer, usually has a current account (British and HK), or checking account (US), or chequing account (CAN) where their money was previously deposited. The drawer writes the various details including the money amount, date, and a payee on the cheque, and signs it, ordering their bank
Bank
A bank is a financial institution that serves as a financial intermediary. The term "bank" may refer to one of several related types of entities:...
, known as the drawee, to pay that person or company the amount of money stated.
Cheques are a type of bill of exchange and were developed as a way to make payments without the need to carry large amounts of gold
Gold
Gold is a chemical element with the symbol Au and an atomic number of 79. Gold is a dense, soft, shiny, malleable and ductile metal. Pure gold has a bright yellow color and luster traditionally considered attractive, which it maintains without oxidizing in air or water. Chemically, gold is a...
and silver
Silver
Silver is a metallic chemical element with the chemical symbol Ag and atomic number 47. A soft, white, lustrous transition metal, it has the highest electrical conductivity of any element and the highest thermal conductivity of any metal...
. While paper money
Banknote
A banknote is a kind of negotiable instrument, a promissory note made by a bank payable to the bearer on demand, used as money, and in many jurisdictions is legal tender. In addition to coins, banknotes make up the cash or bearer forms of all modern fiat money...
evolved from promissory notes
Promissory note
A promissory note is a negotiable instrument, wherein one party makes an unconditional promise in writing to pay a determinate sum of money to the other , either at a fixed or determinable future time or on demand of the payee, under specific terms.Referred to as a note payable in accounting, or...
, another form of negotiable instrument, similar to cheques in that they were originally a written order to pay the given amount to whomever had it in their possession (the "bearer
Bearer instrument
A bearer instrument is a document that indicates that the owner of the document has title to property, such as shares or bonds. Bearer instruments differ from normal registered instruments, in that no records are kept of who owns the underlying property, or of the transactions involving transfer of...
").
Technically, a cheque is a negotiable instrument
Negotiable instrument
A negotiable instrument is a document guaranteeing the payment of a specific amount of money, either on demand, or at a set time. According to the Section 13 of the Negotiable Instruments Act, 1881 in India, a negotiable instrument means a promissory note, bill of exchange or cheque payable either...
Although cheques are regulated in most countries as negotiable instruments, in many countries they are not actually negotiable, viz., the payee cannot endorse the cheque in favour of a third party. Payers could usually designate a cheque as being payable to a named payee only by "crossing" the cheque, thereby designating it as account payee only, but in an effort to combat financial crime, many countries have provided by a combination of law and regulation that all cheques should be treated as crossed, or account payee only, and are not negotiable. instructing a financial institution
Financial institution
In financial economics, a financial institution is an institution that provides financial services for its clients or members. Probably the most important financial service provided by financial institutions is acting as financial intermediaries...
to pay a specific amount of a specific currency
Currency
In economics, currency refers to a generally accepted medium of exchange. These are usually the coins and banknotes of a particular government, which comprise the physical aspects of a nation's money supply...
from a specified transactional account held in the drawer's name with that institution. Both the drawer and payee may be natural person
Natural person
Variously, in jurisprudence, a natural person is a human being, as opposed to an artificial, legal or juristic person, i.e., an organization that the law treats for some purposes as if it were a person distinct from its members or owner...
s or legal entities. Specifically, cheques are order instruments, and are not in general payable simply to the bearer (as bearer instrument
Bearer instrument
A bearer instrument is a document that indicates that the owner of the document has title to property, such as shares or bonds. Bearer instruments differ from normal registered instruments, in that no records are kept of who owns the underlying property, or of the transactions involving transfer of...
s are) but must be paid to the payee. In some countries, such as the US, the payee may endorse the cheque, allowing them to specify a third party to whom it should be paid.
Although cheques have been in use since at least the 9th century, it was during the 20th century that cheques became a highly popular non-cash
Cash
In common language cash refers to money in the physical form of currency, such as banknotes and coins.In bookkeeping and finance, cash refers to current assets comprising currency or currency equivalents that can be accessed immediately or near-immediately...
method for making payment
Payment
A payment is the transfer of wealth from one party to another. A payment is usually made in exchange for the provision of goods, services or both, or to fulfill a legal obligation....
s and the usage of cheques peaked. By the second half of the 20th century, as cheque processing became automated, billions of cheques were issued annually; these volumes peaked in or around the early 1990s. Since then cheque usage has fallen, being partly replaced by electronic payment systems. In some countries cheques have become a marginal payment system
Payment system
A payment system is a system used for transferring money. What makes it a "system" is that it employs cash-substitutes; traditional payment systems are negotiable instruments such as drafts and documentary credits such as letter of credits. With the advent of computers and electronic...
or have been phased out completely.
Spelling
The spellings check, checque, and cheque were used interchangeably from the 17th century until the 20th century. However, since the 19th century, the spelling cheque (from the French word chèque) has become standard for the financial instrument in the CommonwealthCommonwealth of Nations
The Commonwealth of Nations, normally referred to as the Commonwealth and formerly known as the British Commonwealth, is an intergovernmental organisation of fifty-four independent member states...
and Ireland, while check is used only for other meanings, thus distinguishing the two definitions in writing.
In American English
American and British English spelling differences
One of the ways in which American English and British English differ is in spelling.-Historical origins:In the early 18th century, English spelling was not standardized. Differences became noticeable after the publishing of influential dictionaries...
, the usual spelling for both is check.
History
The cheque had its origins in the ancient banking system, in which bankers would issue orders at the request of their customers, to pay money to identified payees. Such an order was referred to as a bill of exchange. The use of bills of exchange facilitated trade by eliminating the need for merchants to carry large quantities of currency (for example, gold) to purchase goods and services.Early years
The ancient Romans are believed to have used an early form of cheque known as praescriptiones in the 1st century BC.In India, during the Mauryan period (from 321 to 185 BC), a commercial instrument called adesha was in use, which was an order on a banker desiring him to pay the money of the note to a third person, which corresponds to the definition of a bill of exchange as we understand it today. During the Buddhist period, there was considerable use of these instruments. Merchants in large towns gave letters of credit to one another. There are also numerous references to promissory notes.
During the 3rd century AD, banks in Persia
Iran
Iran , officially the Islamic Republic of Iran , is a country in Southern and Western Asia. The name "Iran" has been in use natively since the Sassanian era and came into use internationally in 1935, before which the country was known to the Western world as Persia...
and other territories in the Persian Sassanid Empire
Sassanid Empire
The Sassanid Empire , known to its inhabitants as Ērānshahr and Ērān in Middle Persian and resulting in the New Persian terms Iranshahr and Iran , was the last pre-Islamic Persian Empire, ruled by the Sasanian Dynasty from 224 to 651...
issued letters of credit
Letter of credit
A standard, commercial letter of credit is a document issued mostly by a financial institution, used primarily in trade finance, which usually provides an irrevocable payment undertaking....
known as chak (In New Persian script: چک. In Shahnameh
Shahnameh
The Shahnameh or Shah-nama is a long epic poem written by the Persian poet Ferdowsi between c.977 and 1010 AD and is the national epic of Iran and related societies...
there are several mentions of use of chak and in post-Islamic Arabic document this word appears as Arabicised ṣakk or صکّ).
Muslim traders are known to have used the cheque or ṣakk system since the time of Harun al-Rashid
Harun al-Rashid
Hārūn al-Rashīd was the fifth Arab Abbasid Caliph in Iraq. He was born in Rey, Iran, close to modern Tehran. His birth date remains a point of discussion, though, as various sources give the dates from 763 to 766)....
(9th century) of the Abbasid Caliphate.
Between 1118 and 1307, it is believed the Knights Templar
Knights Templar
The Poor Fellow-Soldiers of Christ and of the Temple of Solomon , commonly known as the Knights Templar, the Order of the Temple or simply as Templars, were among the most famous of the Western Christian military orders...
introduced a cheque system for pilgrims travelling to the Holy Land
Holy Land
The Holy Land is a term which in Judaism refers to the Kingdom of Israel as defined in the Tanakh. For Jews, the Land's identifiction of being Holy is defined in Judaism by its differentiation from other lands by virtue of the practice of Judaism often possible only in the Land of Israel...
or across Europe. Pilgrims would deposit funds at one chapter house, then withdraw them from another chapter at their destination by showing a draft of their claim. These drafts were written in a complex code only the Templars could decipher.
In the 13th century in Venice
Venice
Venice is a city in northern Italy which is renowned for the beauty of its setting, its architecture and its artworks. It is the capital of the Veneto region...
the bill of exchange was developed as a legal device to allow international trade without the need to carry large amounts of gold
Gold
Gold is a chemical element with the symbol Au and an atomic number of 79. Gold is a dense, soft, shiny, malleable and ductile metal. Pure gold has a bright yellow color and luster traditionally considered attractive, which it maintains without oxidizing in air or water. Chemically, gold is a...
and silver
Silver
Silver is a metallic chemical element with the chemical symbol Ag and atomic number 47. A soft, white, lustrous transition metal, it has the highest electrical conductivity of any element and the highest thermal conductivity of any metal...
. Their use subsequently spread to other European countries.
In the early 1500s in the Dutch Republic
Financial history of the Dutch Republic
Financial history of the Dutch Republic describes the history of the interrelated development of financial institutions in the Dutch Republic. The rapid economic development of the country after the Dutch Revolt in the years 1585 - 1620, described in Economic History of the Netherlands ,...
, to protect large accumulations of cash, people began depositing their money with "cashiers". These cashiers held the money for a fee. Competition drove cashiers to offer additional services including paying money to any person bearing a written order from a depositor to do so. They kept the note as proof of payment. This concepts went on and spread to England and elsewhere.
Modern era
By the 17th century, bills of exchange were being used for domestic payments in England. Cheques, a type of bill of exchange, then began to evolve. Initially they were called drawn notes, because they enabled a customer to draw on the funds that he or she on account with a banker and required immediate payment. These were handwritten, and one of the earliest known still to be in existence was drawn on Messrs Morris and Clayton, scrivenerScrivener
A scrivener was traditionally a person who could read and write. This usually indicated secretarial and administrative duties such as dictation and keeping business, judicial, and history records for kings, nobles, temples, and cities...
s and bankers based in the City of London
City of London
The City of London is a small area within Greater London, England. It is the historic core of London around which the modern conurbation grew and has held city status since time immemorial. The City’s boundaries have remained almost unchanged since the Middle Ages, and it is now only a tiny part of...
, and dated 16 February 1659.
In 1717, the Bank of England
Bank of England
The Bank of England is the central bank of the United Kingdom and the model on which most modern central banks have been based. Established in 1694, it is the second oldest central bank in the world...
pioneered the first use of a pre-printed form. These forms were printed on "cheque paper" to prevent fraud, and customers had to attend in person and obtain a numbered form from the cashier. Once written, the cheque was brought back to the bank for settlement.
Until about 1770, an informal exchange of cheques took place between London banks. Clerks of each bank visited all the other banks to exchange cheques, whilst keeping a tally of balances between them until they settled with each other. Daily cheque clearing
Clearing (finance)
In banking and finance, clearing denotes all activities from the time a commitment is made for a transaction until it is settled. Clearing is necessary because the speed of trades is much faster than the cycle time for completing the underlying transaction....
began around 1770 when the bank clerks met at the Five Bells, a tavern in Lombard Street
Lombard Street, London
Lombard Street is a street in the City of London.It runs from the corner of the Bank of England at its north-west end, where it meets a major junction including Poultry, King William Street, and Threadneedle Street, south-east to Gracechurch Street....
in the City of London, to exchange all their cheques in one place and settle the balances in cash. See bankers' clearing house
Bankers' clearing house
A bankers' clearing house is an organization that transfers money between member banks, originally to clear checks. For more than a century, this service has been expanded to include several other banking services now done electronically.- Predecessors :...
for further historical developments.
In 1811, the Commercial Bank of Scotland
Commercial Bank of Scotland
The Commercial Bank of Scotland Ltd. was a Scottish commercial bank. It was founded in Edinburgh in 1810, and obtained a royal charter in 1831. It grew substantially through the 19th and early 20th centuries, until 1959, when it merged with the National Bank of Scotland to become the National...
, it is thought, was the first bank to personalise its customers' cheques, by printing the name of the account holder vertically along the left-hand edge. In 1830 the Bank of England
Bank of England
The Bank of England is the central bank of the United Kingdom and the model on which most modern central banks have been based. Established in 1694, it is the second oldest central bank in the world...
introduced books of 50, 100, and 200 forms and counterparts, bound or stitched. These cheque books became a common format for the distribution of cheques to bank customers.
In the late 19th century, several countries formalised laws regarding cheques. The UK passed the Bills of Exchange Act in 1882, and India passed the Negotiable Instruments Act (NI Act) 1881; which both covered cheques.
In 1931 an attempt was made to simplify the international use of cheques by the Geneva Convention on the Unification of the Law Relating to Cheques. Many European and South American states as well as Japan joined the convention. Some countries, including the U.S. and members of the British Commonwealth
Commonwealth of Nations
The Commonwealth of Nations, normally referred to as the Commonwealth and formerly known as the British Commonwealth, is an intergovernmental organisation of fifty-four independent member states...
, did not participate.
In 1959 a standard for machine-readable characters (MICR) was agreed and patented in the U.S. for use with cheques. This opened the way for the first automated reader/sorting machines for clearing cheques. As automation increased, the following years saw a dramatic change in the way in which cheques were handled and processed. Cheque volumes continued to grow; in the late 20th century, cheques were the most popular non-cash
Cash
In common language cash refers to money in the physical form of currency, such as banknotes and coins.In bookkeeping and finance, cash refers to current assets comprising currency or currency equivalents that can be accessed immediately or near-immediately...
method for making payments, with billions of them processed each year. Most countries saw cheque volumes peak in the late 1980s or early 1990s, after which electronic payment methods became more popular and the use of cheques declined.
In 1969 cheque guarantee card
Cheque guarantee card
A cheque guarantee card is essentially an abbreviated portable letter of credit granted by a bank to a qualified depositor, providing that when he is paying a business by cheque and the retailer writes the card number on the back of the cheque, the cheque is signed in the retailer's presence, and...
s were introduced in several countries, allowing a retailer to confirm that a cheque would be honoured when used at a point of sale
Point of sale
Point of sale or checkout is the location where a transaction occurs...
. The drawer would sign the cheque in front of the retailer, who would compare the signature to the signature on the card and then write the cheque-guarantee-card number on the back of the cheque. Such cards were generally phased out and replaced by debit cards, starting in the mid 1990s.
From the mid 1990s, many countries enacted laws to allow for cheque truncation
Cheque truncation
Cheque truncation is the conversion of physical cheque into electronic form for transmission to the paying bank. Cheque truncation eliminates cumbersome physical presentation of the cheque and saves time and processing costs.-History:To settle a cheque it has to be presented to the drawee bank...
, in which a physical cheque is converted into electronic form for transmission to the paying bank or clearing-house. This eliminates the cumbersome physical presentation and saves time and processing costs.
In 2002, Germany and some other European countries phased out the use of cheques altogether when the Eurocheque
Eurocheque
The Eurocheque was a type of cheque used in Europe that was accepted across national borders and which could be written in a variety of currencies....
system, which they had used as their domestic cheque-clearing system, ceased on 1 January 2002. As of 2010, many countries have either phased out the use of cheques altogether or signaled that they would do so in the future.
Parts of a cheque
The four main items on a cheque are- Drawer, the person or entity who makes the cheque
- Payee, the recipient of the money
- Drawee, the bank or other financial institution where the cheque can be presented for payment
- Amount, the currency amount
As cheque usage increased during the 19th and 20th centuries additional items were added to increase security or to make processing easier for the bank or financial institution. A signature of the drawer was required to authorise the cheque and this is the main way to authenticate the cheque. Second it became customary to write the amount in words as well as in numbers to avoid mistakes and make it harder to fraudulently alter the amount after the cheque had been written. It is not a legal requirement to write down the amount in words, although some banks will refuse to accept cheques that do not have the amount in both numbers and words.
An issue date was added, and cheques may not be valid a certain amount of time after issue. In the US and Canada a cheque is typically valid for six months after the date of issue, after which it is a stale-dated cheque, but this depends on where the cheque is drawn; in Australia this is typically fifteen months. A cheque that has an issue date in the future, a post-dated cheque, may not be able to be presented until that date has passed, writing a post dated cheque may simply be ignored or is illegal in some countries. Conversely, an antedated cheque has an issue date in the past.
A cheque number was added and cheque books were issued so that cheque numbers were sequential. This allowed for some basic fraud detection by banks and made sure one cheque was not presented twice.
In some countries such as the US, cheques contain a memo line where the purpose of the cheque can be indicated as a convenience without affecting the official parts of the cheque. In the United Kingdom this is not available and such notes are sometimes written on the reverse side of the cheque.
In the US, at the top (when cheque oriented vertically) of the reverse side of the cheque, there are usually one or more blank lines labelled something like "Endorse here".
Starting in the 1960s machine readable routing and account information was added to the bottom of cheques in MICR format. This allowed automated sorting and routing of cheques between banks and led to automated central clearing facilities. The information provided at the bottom of the cheque is country specific and is driven by each country's cheque clearing system. This meant that the payee no longer had to go to the bank that issued the cheque, instead they could deposit it at their own bank or any other banks and the cheque would be routed back to the originating bank and funds transferred to their own bank account.
For additional protection, a cheque can be crossed
Crossing of cheques
Any cheque crossed with two parallel lines means that the cheque can only be deposited directly into an account with a bank and cannot be immediately cashed by a bank over the counter. By using crossed cheques, cheque writers can effectively protect the cheques they write from being stolen and...
so that funds must be paid into a bank account in the name of the payee. The format and wording varies from country to country, but generally two parallel lines and/or the words 'Account Payee' or similar may be placed either vertically across the cheque or in the top left hand corner. In addition the words 'or bearer' must be not be used or crossed out on the payee line.
Attached documents
Cheques sometimes include additional documents. A page in a chequebook may consist of both the cheque itself and a stub or – when the cheque is written, only the cheque itself is detached, and the stub is retained in the chequebook as a record of the cheque. Alternatively, cheques may be recorded in a separate ledger, such as at the back of a chequebook.When a cheque is mailed, a separate letter or "remittance advice
Remittance advice
A remittance advice is a letter sent by a customer to a supplier, to inform the supplier that their invoice has been paid. If the customer is paying by cheque, the remittance advice often accompanies the cheque...
" may be attached to inform the recipient of the purpose of the cheque – formally, which account receivable to credit the funds to. This is frequently done formally using a provided slip when paying a bill, or informally via a letter when sending an ad hoc cheque.
Usage
Parties to regular cheques generally include a drawer, the depositor writing a cheque; a drawee, the financial institution where the cheque can be presented for payment; and a payee, the entity to whom the drawer issues the cheque. The drawer drafts or draws a cheque, which is also called cutting a cheque, especially in the US. There may also be a beneficiary—for example, in depositing a cheque with a custodianCustodian
The term Custodian may refer to:* Janitor, a person who cleans, maintains, provides security and initiates repairs or makes minor repairs to buildings.* Custodian bank, an organization responsible for safeguarding a firm's or individual's financial assets...
of a brokerage account, the payee will be the custodian, but the cheque may be marked "F/B/O" ("for the benefit of") the beneficiary.
Ultimately, there is also at least one endorsee which would typically be the financial institution servicing the payee's account, or in some circumstances may be a third party to whom the payee owes or wishes to give money.
A payee that accepts a cheque will typically deposit
Deposit account
A deposit account is a current account, savings account, or other type of bank account, at a banking institution that allows money to be deposited and withdrawn by the account holder. These transactions are recorded on the bank's books, and the resulting balance is recorded as a liability for the...
it in an account at the payee's bank, and have the bank process the cheque. In some cases, the payee will take the cheque to a branch of the drawee bank, and cash the cheque there. If a cheque is refused at the drawee bank (or the drawee bank returns the cheque to the bank that it was deposited at) because there are insufficient funds for the cheque to clear, it is said that the cheque has bounced
Non-sufficient funds
Non-sufficient funds is a term used in the banking industry to indicate that a demand for payment cannot be honored because insufficient funds are available in the account on which the instrument was drawn. In simplified terms, a cheque has been presented for clearance, but the amount written on...
. Once a cheque is approved and all appropriate accounts involved have been credited, the cheque is stamped with some kind of cancellation mark, such as a "paid" stamp. The cheque is now a cancelled cheque. Cancelled cheques are placed in the account holder's file. The account holder can request a copy of a cancelled cheque as proof of a payment. This is known as the cheque clearing cycle.
Cheques can be lost or go astray within the cycle, or be delayed if further verification is needed in the case of suspected fraud. A cheque may thus bounce some time after it has been deposited.
Following concerns about the amount of time it took banks to clear cheques, the United Kingdom Office of Fair Trading
Office of Fair Trading
The Office of Fair Trading is a not-for-profit and non-ministerial government department of the United Kingdom, established by the Fair Trading Act 1973, which enforces both consumer protection and competition law, acting as the UK's economic regulator...
set up a working group in 2006 to look at the cheque clearing cycle. Their report acknowledged that clearing times could be improved, but that the costs associated with speeding up the cheque clearing cycle could not be justified considering the use of cheques was declining. However, they concluded the biggest problem was the unlimited time a bank could take to dishonor a cheque. To address this, changes were implemented so that the maximum time after a cheque was deposited that it could be dishonoured was six days, what was known as the "certainty of fate" principle; see Cheque and Credit Clearing Company
Cheque and Credit Clearing Company
The Cheque and Credit Clearing Company Limited is a membership-based industry body with 12 settlement members. The company has managed the cheque clearing system in England and Wales since 1985, and in all of Great Britain since 1996 when it took over responsibility for managing the Scottish...
and "2-4-6".
An advantage to the drawer of using cheques instead of debit card
Debit card
A debit card is a plastic card that provides the cardholder electronic access to his or her bank account/s at a financial institution...
transactions, is that they know the drawer's bank will not release the money until several days later. Paying with a cheque and making a deposit before it clears the drawer's bank is called "kiting
Check kiting
Cheque fraud/check fraud refers to a category of criminal acts that involve making the unlawful use of cheques in order to illegally acquire or borrow funds that do not exist within the account balance or account-holder's legal ownership...
" or "floating" and is generally illegal in the US, but rarely enforced unless the drawer uses multiple chequing accounts with multiple institutions to increase the delay or to steal the funds.
Declining use
Cheques have been in decline for some years, both for point of salePoint of sale
Point of sale or checkout is the location where a transaction occurs...
transactions (for which credit card
Credit card
A credit card is a small plastic card issued to users as a system of payment. It allows its holder to buy goods and services based on the holder's promise to pay for these goods and services...
s and debit card
Debit card
A debit card is a plastic card that provides the cardholder electronic access to his or her bank account/s at a financial institution...
s are increasingly preferred) and for third party payments (for example, bill payments), where the decline has been accelerated by the emergence of telephone banking and online banking
Online banking
Online banking allows customers to conduct financial transactions on a secure website operated by their retail or virtual bank, credit union or building society.-Features:...
. Being paper-based, cheques are costly for banks to process in comparison to electronic payments, so banks in many countries now discourage the use of cheques, either by charging for cheques or by making the alternatives more attractive to customers. Cheques are also more costly for the issuer and receiver of a cheque. In particular the handling of money transfer requires more effort and is time consuming. The cheque has to be handed over on a personal meeting or has to be sent by mail. The rise of automated teller machine
Automated teller machine
An automated teller machine or automatic teller machine, also known as a Cashpoint , cash machine or sometimes a hole in the wall in British English, is a computerised telecommunications device that provides the clients of a financial institution with access to financial transactions in a public...
s (ATMs) means that small amounts of cash are often easily accessible, so that it is sometimes unnecessary to write a cheque for such amounts instead.
Alternatives to cheques
In addition to cashCash
In common language cash refers to money in the physical form of currency, such as banknotes and coins.In bookkeeping and finance, cash refers to current assets comprising currency or currency equivalents that can be accessed immediately or near-immediately...
there are number of other payment system
Payment system
A payment system is a system used for transferring money. What makes it a "system" is that it employs cash-substitutes; traditional payment systems are negotiable instruments such as drafts and documentary credits such as letter of credits. With the advent of computers and electronic...
s that have emerged to compete against cheques;
- Debit cardDebit cardA debit card is a plastic card that provides the cardholder electronic access to his or her bank account/s at a financial institution...
payments - Credit cardCredit cardA credit card is a small plastic card issued to users as a system of payment. It allows its holder to buy goods and services based on the holder's promise to pay for these goods and services...
payments - Direct debitDirect debitA direct debit or direct withdrawal is an instruction that a bank account holder gives to his or her bank to collect an amount directly from another account. It is similar to a direct deposit but initiated by the beneficiary...
(initiated by payee) - Direct creditDirect depositDirect deposit also known as Direct credit is a banking term used to refer to certain payment systems used to transfer money where a payment is initiated by the payer not the payee, namely:* In Europe, the giro system...
(initiated by payer), ACHAutomated Clearing HouseAutomated Clearing House is an electronic network for financial transactions in the United States. ACH processes large volumes of credit and debit transactions in batches. ACH credit transfers include direct deposit payroll and vendor payments. ACH direct debit transfers include consumer payments...
in US, giroGiroA Giro or giro transfer is a payment transfer from one bank account to another bank account and instigated by the payer, not the payee...
in Europe - Wire transferWire transferWire transfer or credit transfer is a method of electronic funds transfer from one person or institution to another. A wire transfer can be made from one bank account to another bank account or through a transfer of cash at a cash office...
(local and international) - Electronic bill paymentElectronic bill paymentElectronic bill payment is a feature of online banking, similar in its effect to a giro, allowing a depositor to send money from their demand account to a creditor or vendor such as a public utility or a department store to be credited against a specific account...
s using Internet banking - Online payment services (for example PayPalPayPalPayPal is an American-based global e-commerce business allowing payments and money transfers to be made through the Internet. Online money transfers serve as electronic alternatives to paying with traditional paper methods, such as checks and money orders....
and WorldPayWorldPayWorldPay is a payment processing company. It provides payment services for mail order and internet retailers, as well as point of sale transactions. Customers are a mix of multinational, multichannel retailers, with the majority being small business merchants...
)
Europe
In most European countries, cheques are now rarely used, even for third party payments. In these countries, it is standard practice for businesses to publish their bank details on invoices, to facilitate the receipt of payments by giroGiro
A Giro or giro transfer is a payment transfer from one bank account to another bank account and instigated by the payer, not the payee...
. Even before the introduction of online banking, it has been possible in some countries to make payments to third parties using ATMs
Automated teller machine
An automated teller machine or automatic teller machine, also known as a Cashpoint , cash machine or sometimes a hole in the wall in British English, is a computerised telecommunications device that provides the clients of a financial institution with access to financial transactions in a public...
, which may accurately and rapidly capture invoice amounts, due dates, and payee bank details via a bar code reader to reduce keying. In some countries, entering the bank account number results in the bank revealing the name of the payee as an added safeguard against fraud. In using a cheque, the onus is on the payee to initiate the payment, whereas with a giro transfer, the onus is on the payer to effect the payment. The process is also procedurally more simple, as no cheques are ever posted, can claim to have been posted, or need banking or clearance.
In Germany, Austria, the Netherlands, Belgium, and Scandinavia, cheques have almost completely vanished in favour of direct bank transfers and electronic payments. Direct bank transfers, using so-called giro transfers, have been standard procedure since the 1950s to send and receive regular payments like rent and wages and even mail-order invoices. In the Netherlands, Austria, and Germany, all kinds of invoices are commonly accompanied by so-called acceptgiro's (Netherlands) or Überweisungen (German), which are essentially standardised bank transfer order forms preprinted with the payee's account details and the amount payable. The payer fills in his account details and hands the form to a clerk at his bank, which will then transfer the money. It is also very common to allow the payee to automatically withdraw the requested amount from the payer's account (Lastschrifteinzug (German) or Incasso (machtiging) (Netherlands)). Though similar to paying by cheque, the payee only needs the payer's bank and account number. Since the early 1990s, this method of payment has also been available to merchants. Due to this, credit cards are rather uncommon in Germany and Austria, and are mostly used to give access to credit rather than as a payment mechanism. However, debit cards are widespread in these countries, since virtually all Austrian and German banks issue debit cards instead of simple ATM card
ATM card
An ATM card is a card issued by a bank, credit union or building society that can be used at an ATM for deposits, withdrawals, account information, and other types of transactions, often through interbank networks.Some ATM cards can also be used:* at a branch, as identification for in-person...
s for use on current accounts. Acceptance of cheques has been further diminished since the late 1990s, because of the abolition of the Eurocheque
Eurocheque
The Eurocheque was a type of cheque used in Europe that was accepted across national borders and which could be written in a variety of currencies....
. Cashing a foreign bank cheque is possible, but usually very expensive.
In Finland, banks stopped issuing personal cheques in about 1993 in favour of giro systems, which are now almost exclusively electronically initiated either via internet banking or payment machines located at banks and shopping malls. All Nordic countries
Nordic countries
The Nordic countries make up a region in Northern Europe and the North Atlantic which consists of Denmark, Finland, Iceland, Norway and Sweden and their associated territories, the Faroe Islands, Greenland and Åland...
have used an interconnected international giro system since the 1950s, and in Sweden, cheques are now totally abandoned. Electronic payments across the European Union are now fast and inexpensive—usually free for consumers.
In Poland cheques were withdrawn from use in 2006, mainly because of lack of popularity due to the widespread adoption of credit
Credit card
A credit card is a small plastic card issued to users as a system of payment. It allows its holder to buy goods and services based on the holder's promise to pay for these goods and services...
and debit card
Debit card
A debit card is a plastic card that provides the cardholder electronic access to his or her bank account/s at a financial institution...
s.
In the United Kingdom, Ireland, and France, some people still use cheques, partly because cheques remain free of charge to personal customers; however, bank-to-bank transfers are increasing in popularity. Since 2001, businesses in the United Kingdom have made more electronic payments than cheque payments. Most utilities in the United Kingdom charge lower prices to customers who pay by direct debit
Direct debit
A direct debit or direct withdrawal is an instruction that a bank account holder gives to his or her bank to collect an amount directly from another account. It is similar to a direct deposit but initiated by the beneficiary...
than for other payment methods, including electronic methods. The vast majority of retailers in the United Kingdom and many in France no longer accept cheques as a means of payment. For example Shell
Royal Dutch Shell
Royal Dutch Shell plc , commonly known as Shell, is a global oil and gas company headquartered in The Hague, Netherlands and with its registered office in London, United Kingdom. It is the fifth-largest company in the world according to a composite measure by Forbes magazine and one of the six...
announced in September 2005 that it would no longer accept cheques in its UK petrol stations. More recently, this has been followed by other major fuel retailers, such as Texaco
Texaco
Texaco is the name of an American oil retail brand. Its flagship product is its fuel "Texaco with Techron". It also owns the Havoline motor oil brand....
, BP
BP
BP p.l.c. is a global oil and gas company headquartered in London, United Kingdom. It is the third-largest energy company and fourth-largest company in the world measured by revenues and one of the six oil and gas "supermajors"...
, and Total
Total S.A.
Total S.A. is a French multinational oil company and one of the six "Supermajor" oil companies in the world.Its businesses cover the entire oil and gas chain, from crude oil and natural gas exploration and production to power generation, transportation, refining, petroleum product marketing, and...
. Asda
Asda
Asda Stores Ltd is a British supermarket chain which retails food, clothing, general merchandise, toys and financial services. It also has a mobile telephone network, , Asda Mobile...
announced in April 2006 that it would stop accepting cheques, initially as a trial in the London area, and Boots announced in September 2006 that it would stop accepting cheques, initially as a trial in Sussex
Sussex
Sussex , from the Old English Sūþsēaxe , is an historic county in South East England corresponding roughly in area to the ancient Kingdom of Sussex. It is bounded on the north by Surrey, east by Kent, south by the English Channel, and west by Hampshire, and is divided for local government into West...
and Surrey
Surrey
Surrey is a county in the South East of England and is one of the Home Counties. The county borders Greater London, Kent, East Sussex, West Sussex, Hampshire and Berkshire. The historic county town is Guildford. Surrey County Council sits at Kingston upon Thames, although this has been part of...
. Currys
Currys
Currys is an electrical retailer in the United Kingdom and Ireland and is owned by Dixons Retail plc. It specialises in selling home electronics and household appliances, with 295 superstores and 73 high street stores...
(and other stores in the DSGi group
DSG International (retailer)
Dixons Retail plc is a British company and one of the largest consumer electronics retailers in Europe. The company operates Dixons.co.uk as well as Dixons Travel, Currys, Currys.digital, PC World and Electro World stores along with many other brands across Europe including: Pixmania, Equanet and...
) and WH Smith also no longer accept cheques. Cheques are now widely predicted to become a thing of the past, or at most, a niche product used to pay private individuals or for the very large number of small service providers who are not used to providing their bank details to customers to allow electronic payments to be made to them, and/or do not wish to be burdened with checking their bank account frequently and reconciling their contents with amounts due (for example, music teachers, driving instructors, children's sports lessons, small shops, schools). The UK Payments Council
Payments Council
The Payments Council is an organisation of financial institutions in the United Kingdom that sets strategy for UK payment mechanisms.-History:...
announced in December 2009 that cheques would be phased out by October 2018, but only if adequate alternatives are developed. They intended to perform annual checks on the progress of other payments systems and a final review of the decision would have been held in 2016. Concerns were expressed, however, by charities and older people, who are still heavy users of cheques, and replacement plans have been criticised as open to fraud. However it was announced by the UK Payment's Council in July 2011 that the cheque will not be eliminated as a paper-initiated payment.
North America
The US still relies heavily on cheques, due to the convenience it affords payers, and due to the absence of a high volume system for low value electronic payments. About 70 billion cheques were written annually in the US by 2001, though around 17 million adult Americans do not have bank accountsUnbanked
The unbanked are citizens of a country who do not have their own bank account. Along with the underbanked, they may rely on alternative financial services for their financial needs, where these are available.-The unbanked in the United States:...
at all. When sending a payment by online banking in the US at some banks, the sending bank mails a cheque to the payee's bank or to the payee rather than sending the funds electronically. Certain companies whom a person pays with a cheque will turn it into an Automated Clearing House
Automated Clearing House
Automated Clearing House is an electronic network for financial transactions in the United States. ACH processes large volumes of credit and debit transactions in batches. ACH credit transfers include direct deposit payroll and vendor payments. ACH direct debit transfers include consumer payments...
(ACH) or electronic transaction. Banks try to save time processing cheques by sending them electronically between banks. Cheque clearing is usually done through an electronic cheque broker, or the Federal Reserve Banks. Copies of the cheques are stored at a bank or the broker, for periods up to 99 years, and this is why some cheque archives have grown to 20 petabytes. The access to these archives is now world wide, as most bank programming is now done offshore. Many utilities and most credit cards will also allow customers to pay by providing bank information and having the payee draw payment from the customer's account (direct debit
Direct debit
A direct debit or direct withdrawal is an instruction that a bank account holder gives to his or her bank to collect an amount directly from another account. It is similar to a direct deposit but initiated by the beneficiary...
). Many people in the US still use paper money order
Money order
A money order is a payment order for a pre-specified amount of money. Because it is required that the funds be prepaid for the amount shown on it, it is a more trusted method of payment than a cheque.-History of money orders:...
s to pay bills or transfer money which is a unique type of cheque. They have security advantages over mailing cash, and do not require access to a bank account.
Canada's usage of cheques is slightly less than that of the US. The Interac
Interac
Interac Association is a Canadian organization linking enterprises that have proprietary networks so that they may communicate with each other for the purpose of exchanging electronic financial transactions. The Association was founded in 1984 as a cooperative venture between five financial...
system, which allows instant fund transfers via chip
Chip
- Food :* Potato chips , a snack food made from potatoes, also known as crisps in the UK and some other English-speaking countries...
or magnetic strip and PIN
Personal identification number
A personal identification number is a secret numeric password shared between a user and a system that can be used to authenticate the user to the system. Typically, the user is required to provide a non-confidential user identifier or token and a confidential PIN to gain access to the system...
, is widely used by merchants to the point that few brick and mortar merchants accept cheques. Many merchants accept Interac debit payments but not credit card payments, even though most Interac terminals can support credit card payments. Financial institutions also facilitate transfers between accounts within different institutions with the Email Money Transfer
Email Money Transfer
Interac e-Transfer is a funds transfer service between personal and business accounts at participating Canadian financial institutions...
(EMT) service.
Cheques are still widely used for government cheques, payroll, rent, and utility bill payments, though direct deposit
Direct deposit
Direct deposit also known as Direct credit is a banking term used to refer to certain payment systems used to transfer money where a payment is initiated by the payer not the payee, namely:* In Europe, the giro system...
s and online/telephone bill payments are also widely offered.
Asia
In many Asian countries cheques were never widely used and generally only used by the wealthy, with cashCash
In common language cash refers to money in the physical form of currency, such as banknotes and coins.In bookkeeping and finance, cash refers to current assets comprising currency or currency equivalents that can be accessed immediately or near-immediately...
being used for the majority of payments. Where cheques were used they have been declining rapidly, by 2009 there was negligible consumer cheque usage in Japan, South Korea and Taiwan
Taiwan
Taiwan , also known, especially in the past, as Formosa , is the largest island of the same-named island group of East Asia in the western Pacific Ocean and located off the southeastern coast of mainland China. The island forms over 99% of the current territory of the Republic of China following...
. This declining trend was accelerated by these developed markets advanced financial services infrastructure. Many of the developing markets have seen an increasing use of electronic payment systems, 'leap-frogging' the less efficient chequing system altogether.
India had a long tradition of using cheques, it passed laws to formalise cheque usage in 1881, and was one of the Asian countries that did had significant cheque usage. As of 2009 there was wide usage of cheques as payment method in trade, and also by individuals as preferred option to pay other individuals or to pay utility bills. One of the reasons was that banks usually provided cheques for free to their individual account holders. However cheques are now rarely accepted at point of sale
Point of sale
Point of sale or checkout is the location where a transaction occurs...
in retail stores where cash and cards
Bank card
A bank card is a plastic card issued by a bank to its clients that may perform one or more of the following services:* ATM card, card used for transactions at automatic teller machines* Debit card, card linked to a bank account and used for making purchases...
are payment methods of choice. Electronic payment transfer continued to gain popularity in India and like other countries this has caused a subsequent reduction in volumes of cheques issued each year.
Oceania
In Australia, following global trends, the use of cheques continues to decline. In 1994 the value of daily cheque transactions was AU$25 billion; by 2004 this had dropped to only AU$5 billion.As in other countries, New Zealand payment statistics indicate a strong move away from cheques in favour of electronic payment methods. From being the most popular form of non-cash payment until the mid-1990s, cheques now lag far behind EFTPOS
EFTPOS
EFTPOS is the general term used for debit card based systems used for processing transactions through terminals at points of sale. In Australia and New Zealand it is also the brand name of the specific system used for such payments...
payment transactions and electronic credits. Their usage is declining at about 6% per year. In 1993, cheque payments accounted for over 50% of transactions through the banking system with an averaged 130 cheques per capita. By the end of 2006, this had dropped to 9% with 41 cheques per capita.
Variations on regular cheques
In addition to regular cheques, a number of variations were developed to address specific needs or to address issues when using a regular cheque.Cashier’s cheques and bank drafts
Cashier's chequesCashier's check
A cashier's check is a check guaranteed by a bank. They are treated as guaranteed funds and are usually cleared the next day. It is the customer's right to request "next-day availability" when depositing a cashier's check in person...
and banker's draft
Banker's draft
A banker's draft is a cheque where the funds are taken directly from the financial institution rather than the individual drawer's account....
s also known as a bank cheque or treasurer's cheque, are cheques issued against the funds of a financial institution rather than an individual account holder. Typically, the term cashier's cheques are used in the US and banker's drafts are used in the UK. The mechanism differs slightly from country to country but in general the bank issuing the cashiers cheque or bankers draft will allocate the funds at the point the cheque is drawn. This provides a guarantee, save for a failure of the bank, that it will be honoured. Cashier's cheques are perceived to be as good as cash but they are still a cheque, a misconception often exploited by scam artists. A lost or stolen cheque can still be stopped like any other cheque, so payment is not completely guaranteed.
Certified cheque
When a certified chequeCertified check
A certified check or certified cheque is a form of check for which the bank verifies that sufficient funds exist in the account to cover the check, and so certifies, at the time the check is written. Those funds are then set aside in the bank's internal account until the check is cashed or returned...
is drawn, the bank operating the account verifies there are currently sufficient funds in the drawer's account to honour the cheque. Those funds are then set aside in the bank's internal account until the cheque is cashed or returned by the payee. Thus, a certified cheque cannot "bounce", and its liquidity is similar to cash, absent failure of the bank. The bank indicates this fact by making a notation on the face of the cheque (technically called an acceptance).
Payroll cheque
A cheque used to pay wages may be referred to as a payroll cheque. Even when the use of cheques for paying wages and salaries became rare, the vocabulary "pay cheque" still remained commonly used to describe the payment of wages and salaries. Payroll cheques issued by the military to soldiers, or by some other government entities to their employees, beneficiants, and creditors, are referred to as warrantsWarrant (finance)
In finance, a warrant is a security that entitles the holder to buy the underlying stock of the issuing company at a fixed exercise price until the expiry date....
.
Warrants
Warrants look like cheques and clear through the banking system like cheques, but are not drawn against cleared funds in a deposit accountDeposit account
A deposit account is a current account, savings account, or other type of bank account, at a banking institution that allows money to be deposited and withdrawn by the account holder. These transactions are recorded on the bank's books, and the resulting balance is recorded as a liability for the...
. A cheque differs from a warrant in that the warrant is not necessarily payable on demand and may not be negotiable. They are often issued by government entities such as the military to pay wages or suppliers. In this case they are an instruction to the entity's treasurer department to pay the warrant holder on demand or after a specified maturity date.
Travellers cheque
A traveller's cheque is designed to allow the person signing it to make an unconditional payment to someone else as a result of paying the account holder for that privilege. Traveller's cheques can usually be replaced if lost or stolen, and people often used to use them on vacation instead of cash as many businesses used to accept traveller's cheques as currency. The use of creditCredit card
A credit card is a small plastic card issued to users as a system of payment. It allows its holder to buy goods and services based on the holder's promise to pay for these goods and services...
or debit card
Debit card
A debit card is a plastic card that provides the cardholder electronic access to his or her bank account/s at a financial institution...
s has begun to replace the traveller's cheque as the standard for vacation money due to their convenience and additional security for the retailer. This has resulted in many businesses no longer accepting traveller's cheques.
Money or postal order
A cheque sold by a post officePost office
A post office is a facility forming part of a postal system for the posting, receipt, sorting, handling, transmission or delivery of mail.Post offices offer mail-related services such as post office boxes, postage and packaging supplies...
or merchant such as a grocery for payment by a third party for a customer is referred to as a money order
Money order
A money order is a payment order for a pre-specified amount of money. Because it is required that the funds be prepaid for the amount shown on it, it is a more trusted method of payment than a cheque.-History of money orders:...
or postal order
Postal Order
In the United Kingdom , a Postal Order is used for sending money through the mail. In the United States, this is known as a Postal money order...
. These are paid for in advance when the order is drawn and are guaranteed by the institution that issues them and can only be paid to the named third party. This was a common way to send low value payments to third parties, avoiding the risks associated with sending cash via the mail, prior to the advent of electronic payment methods.
Oversized cheques
Publishers Clearing House
Publishers Clearing House is a multi-channel direct marketing company that offers discounted magazine subscriptions and household merchandise to consumers with the chance to enter to win one of many ongoing sweepstakes...
. The cheques are commonly 18 by 36 in (45.7 by 91.4 cm) in size, however, according to the Guinness Book of World Records
Guinness World Records
Guinness World Records, known until 2000 as The Guinness Book of Records , is a reference book published annually, containing a collection of world records, both human achievements and the extremes of the natural world...
, the largest ever is 12 by 25 m (39.4 by 82 ). Regardless of the size, such cheques can still be redeemed for their cash value as long as they have the same parts as a normal cheque, although usually the oversized cheque is kept as a souvenir and a normal cheque is provided. A bank may levy additional charges for clearing an oversized cheque.
Payment vouchers
In the US some public assistance programs such as the Special Supplemental Nutrition Program for Women, Infants and ChildrenSpecial Supplemental Nutrition Program for Women, Infants and Children
The Special Supplemental Nutrition Program for Women, Infants and Children is a Federal assistance program of the Food and Nutrition Service of the United States Department of Agriculture for healthcare and nutrition of low-income pregnant women, breastfeeding women, and infants and children...
, or Aid to Families with Dependent Children
Aid to Families with Dependent Children
Aid to Families with Dependent Children was a federal assistance program in effect from 1935 to 1996, which was administered by the United States Department of Health and Human Services...
make vouchers available to their beneficiaries, which are good up to a certain monetary amount for purchase of grocery items deemed eligible under the particular programme. The voucher can be deposited like any other cheque by a participating supermarket
Supermarket
A supermarket, a form of grocery store, is a self-service store offering a wide variety of food and household merchandise, organized into departments...
or other approved business.
Australia
The Cheques Act 1986 is the body of law governing the issuance of cheques and payment orders in Australia. Procedural and practical issues governing the clearance of cheques and payment orders are handled by Australian Payments Clearing AssociationAustralian Payments Clearing Association
The Australian Payments Clearing Association , established February 1992, is an organisation that sets, manages and develops regulations, procedures and standards governing payments clearing and settlement within Australia. Payments systems covered by APCA's rules include cheques, direct entry,...
(APCA).
In 1999, banks adopted a system to allow faster clearance of cheques by electronically transmitting information about cheques, this brought clearance times down from five to three days. Prior to that cheques had to be physically transported to the paying bank before processing began. If it was dishonoured, it was physically returned.
All licensed banks in Australia may issue cheques in their own name. Non-banks are not permitted to issue cheques in their own name but may issue, and have drawn on them, payment orders (which functionally are no different from cheques).
Canada
In Canada, cheque sizes and types—as well as endorsements requirements and MICR tolerances are overseen by the Canadian Payments AssociationCanadian payments association
The Canadian Payments Association is a not-for-profit organization that:*operates and maintains national systems for the clearing and settlement of payments and other arrangements for the making or exchange of payments;...
(CPA)
- It is possible to write cheques in currencies (using the standardised ISO currencyISO 4217ISO 4217 is a standard published by the International Standards Organization, which delineates currency designators, country codes , and references to minor units in three tables:* Table A.1 – Current currency & funds code list...
names) that are not in Canadian DollarCanadian dollarThe Canadian dollar is the currency of Canada. As of 2007, the Canadian dollar is the 7th most traded currency in the world. It is abbreviated with the dollar sign $, or C$ to distinguish it from other dollar-denominated currencies...
s. - Canadian cheques can legally be written in English or French or Eskimo–Aleut languages.
- Personal cheques in Canada are sold directly from financial institutions through commercial suppliers.
- Business cheques in Canada are also sold directly through financial institutions at the branch or online through commercial suppliers.
- A tele-cheque is a paper payment item that resembles a cheque except that it is neither created nor signed by the payer—instead it is created (and may be signed) by a third party on behalf of the payer. Under CPA Rules these are prohibited in the clearing system effective 27 January 2004.
India
Cheque were introduced in India by the Bank of Hindustan, the first joint stock bank established in 1770.In 1881, the Negotiable Instruments Act (NI Act) was enacted in India, formalising the usage and characteristics of instruments like the cheque the bill of exchange and promissory note. The NI Act provided a legal framework for non-cash paper payment instruments in India.
In 1938, the Calcutta Clearing Banks' Association, which was the largest bankers' association at that time, adopted clearing house.
New Zealand
Instrument-specific legislation includes the Cheques Act 1960, part of the Bills of Exchange Act 1908, which codifies aspects related to the cheque payment instrument, notably the procedures for the endorsement, presentment and payment of cheques. A 1995 amendment provided for the electronic presentment of cheques and removed the previous requirement to deliver cheques physically to the paying bank, opening the way for cheque truncationCheque truncation
Cheque truncation is the conversion of physical cheque into electronic form for transmission to the paying bank. Cheque truncation eliminates cumbersome physical presentation of the cheque and saves time and processing costs.-History:To settle a cheque it has to be presented to the drawee bank...
and imaging. Truncation allows for the transmission of an electronic image of all or part of the cheque to the paying bank’s branch, instead of the cumbersome physical presentment. This reduced the total cheque clearance time, as well as eliminating the costs of physically moving the cheque.
The registered banks under supervision of Reserve Bank of New Zealand
Reserve Bank of New Zealand
The Reserve Bank of New Zealand is the central bank of New Zealand and is constituted under the Reserve Bank of New Zealand Act 1989. The Governor of the Reserve Bank is responsible for New Zealand's currency and operating monetary policy. The Bank's current Governor is Dr. Alan Bollard...
provide the cheque payment services. Once banked, cheques are processed electronically together with other retail payment instrument.
United Kingdom
In the UK all cheques must now conform to "Cheque and Credit Clearing CompanyCheque and Credit Clearing Company
The Cheque and Credit Clearing Company Limited is a membership-based industry body with 12 settlement members. The company has managed the cheque clearing system in England and Wales since 1985, and in all of Great Britain since 1996 when it took over responsibility for managing the Scottish...
(C&CCC) Standard 3", the industry standard detailing layout and font, be printed on a specific weight of paper (CBS1), and contain explicitly defined security features.
Since 1995, all cheque printers must be members of the Cheque Printer Accreditation Scheme (CPAS). The scheme is managed by the Cheque and Credit Clearing Company and requires that all cheques for use in the British clearing process are produced by accredited printers who have adopted stringent security standards.
The rules concerning crossed cheques are set out in Section 1 of the Cheques Act 1992 and prevent cheques being
cashed by or paid into the accounts of third parties. On a crossed cheque the words “account payee only” (or similar)
are printed between two parallel vertical lines in the centre of the cheque. This makes the cheque non-transferable and is to avoid cheques being endorsed and paid into an account other than that of the named payee. Crossing cheques
basically ensures that the money is paid into an account of the intended beneficiary of the cheque.
Following concerns about the amount of time it took banks to clear cheques, the United Kingdom Office of Fair Trading
Office of Fair Trading
The Office of Fair Trading is a not-for-profit and non-ministerial government department of the United Kingdom, established by the Fair Trading Act 1973, which enforces both consumer protection and competition law, acting as the UK's economic regulator...
set up a working group in 2006 to look at the cheque clearing cycle. They produced a report recommending maximum times for the cheque clearing which were introduced in UK from November 2007. In the report the date the credit appeared on the recipient's account (usually the day of deposit) was designated "T". At "T + 2" (two business days afterwards) the value would count for calculation of credit interest or overdraft interest on the recipient's account. At "T + 4" clients would be able to withdraw funds (though this will often happen earlier, at the bank's discretion). "T + 6" is the last day that a cheque can bounce without the recipient's permission—this is known as "certainty of fate". Before the introduction of this standard, the only way to know the "fate" of a cheque has been "Special Presentation", which would normally involve a fee, where the drawee bank contacts the payee bank to see if the payee has that money at that time. "Special Presentation" needed to be stated at the time of depositing in the cheque.
Cheque volumes peaked in 1990 when four billion cheque payments were made. Of these, 2.5 billion were cleared through the inter-bank clearing managed by the C&CCC, the remaining 1.5 billion being in-house cheques which were either paid into the branch on which they were drawn or processed intra-bank without going through the clearings. As volumes started to fall, the challenges faced by the clearing banks were then of a different nature: how to benefit from technology improvements in a declining business environment.
Although the UK did not adopt the euro as its national currency when other European countries did in 1999, many banks began offering euro denominated accounts with chequebooks, principally to business customers. The cheques can be used to pay for certain goods and services in the UK. The same year, the C&CCC set up the euro cheque clearing system to process euro denominated cheques separately from sterling cheques in Great Britain.
The UK Payments Council
Payments Council
The Payments Council is an organisation of financial institutions in the United Kingdom that sets strategy for UK payment mechanisms.-History:...
from 30 June 2011 withdrew the existing Cheque Guarantee Card Scheme in the UK. This service allowed cheques to be guaranteed at point of sales up to a certain value, normally £50 or £100, when signed in front of the retailer with the additional cheque guarantee card. This was after a long period of decline in their use in favour of debit cards.
The Payments Council proposed to withdraw the use of cheques altogether in the UK and had set a target date for this of 31 October 2018. However, on 12 July 2011, the Payments Council announced that after opposition from MPs, charity groups and public opinion, the cheque will remain in use and there would no longer be a reason to seek an alternative paper-initiated payment.
United States
In the US, cheques (spelled "checks") are governed by Article 3 of the Uniform Commercial CodeUniform Commercial Code
The Uniform Commercial Code , first published in 1952, is one of a number of uniform acts that have been promulgated in conjunction with efforts to harmonize the law of sales and other commercial transactions in all 50 states within the United States of America.The goal of harmonizing state law is...
, under the rubric of negotiable instrument
Negotiable instrument
A negotiable instrument is a document guaranteeing the payment of a specific amount of money, either on demand, or at a set time. According to the Section 13 of the Negotiable Instruments Act, 1881 in India, a negotiable instrument means a promissory note, bill of exchange or cheque payable either...
s.
- An order check — the most common form in the US — is payable only to the named payee or his or her endorsee, as it usually contains the language "Pay to the order of (name)."
- A bearer check is payable to anyone who is in possession of the document: this would be the case if the cheque does not state a payee, or is payable to "bearer" or to "cash" or "to the order of cash", or if the cheque is payable to someone who is not a person or legal entity, for example if the payee line is marked "Happy Birthday".
- A counter check is a bank cheque given to customers who have run out of cheques or whose cheques are not yet available. It is often left blank — hence sometimes called a "blank check", though this term has other uses — and is used for purposes of withdrawal.
In the US, the terminology for a cheque historically varied with the type of financial institution on which it is drawn. In the case of a savings and loan association
Savings and loan association
A savings and loan association , also known as a thrift, is a financial institution that specializes in accepting savings deposits and making mortgage and other loans...
it was a negotiable order of withdrawal (compare Negotiable Order of Withdrawal account
Negotiable Order of Withdrawal account
In the United States, a Negotiable Order of Withdrawal account is a deposit account that pays interest, on which checks may be written....
); if a credit union
Credit union
A credit union is a cooperative financial institution that is owned and controlled by its members and operated for the purpose of promoting thrift, providing credit at competitive rates, and providing other financial services to its members...
it was a share draft. Checks were associated with chartered commercial banks. However, common usage has increasingly conformed to more recent versions of Article 3, where check means any or all of these negotiable instruments. Certain types of cheques drawn on a government agency, especially payroll cheques, may be called a payroll warrant.
At the bottom of each cheque there is the routing / account number in MICR format. The routing transit number
Routing transit number
A routing transit number is a nine digit bank code, used in the United States, which appears on the bottom of negotiable instruments such as checks identifying the financial institution on which it was drawn...
is a nine-digit number in which the first four digits identifies the US Federal Reserve Bank's cheque-processing center. This is followed by digits 5 through 8, identifying the specific bank served by that cheque-processing center. Digit 9 is a verification check digit
Check digit
A check digit is a form of redundancy check used for error detection, the decimal equivalent of a binary checksum. It consists of a single digit computed from the other digits in the message....
, computed using a complex algorithm of the previous eight digits.
- Typically the routing number is followed by a group eight or nine MICR digits that indicates the particular account number at that bank. The account number is assigned independently by the various banks.
- Typically the account number is followed by a group of three or four MICR digits that indicates a particular cheque number from that account.
- fractional routing number (U.S. only)—also known as the transit number, consists of a denominator mirroring the first four digits of the routing number. And a hyphenated numerator, also known as the ABA number, in which the first part is a city code (1–49), if the account is in one of 49 specific cities, or a state code (50–99) if it is not in one of those specific cities; the second part of the hyphenated numerator mirrors the 5th through 8th digits of the routing number with leading zeros removed.
A draft is a bill of exchange which is not payable on demand of the payee. (However, draft in the US Uniform Commercial Code
Uniform Commercial Code
The Uniform Commercial Code , first published in 1952, is one of a number of uniform acts that have been promulgated in conjunction with efforts to harmonize the law of sales and other commercial transactions in all 50 states within the United States of America.The goal of harmonizing state law is...
today means any bill of exchange, whether payable on demand or at a later date; if payable on demand it is a "demand draft
Demand draft
A demand draft, also known as a remotely created check, a tele-check, or check by phone, check by fax or echeck, is a check created by a merchant with a buyer's checking account number on it, but without the buyer's original signature....
", or if drawn on a financial institution, a cheque.)
Cheque truncation
Cheque truncation
Cheque truncation is the conversion of physical cheque into electronic form for transmission to the paying bank. Cheque truncation eliminates cumbersome physical presentation of the cheque and saves time and processing costs.-History:To settle a cheque it has to be presented to the drawee bank...
was introduced in 2004 with the passing of the "Check Clearing for the 21st Century Act" (or Check 21 Act
Check 21 Act
The Check Clearing for the 21st Century Act is a United States federal law, , that was enacted on October 28, 2003 by the 108th Congress. The Check 21 Act took effect one year later on October 28, 2004...
), this allowed the creation of electronic substitute check
Substitute check
A substitute check is a negotiable instrument used in the United States to represent the digital reproduction of an original paper check...
s to replace the physical cheques, reducing cost and processing time.
Turkey
Within the frame of the liberal economy, trade and commercial relations between merchants are carried out by means of post-dated checks in Turkey.- According to Article 38/8 of the Turkish Constitution, as amended in 2001 taking into regard the European Convention on Human Rights, "no one can be detained from his/her freedom due to only his/her failure to fulfill a contractual liability”. As such, prohibition of detainment of freedom due to only failure to fulfill a contractual liability (i.e., provision for “no imprisonment for debt”) has been added to our constitution. This provision, taken from the Article 1 of the Protocol constituting the 4th Annex to European Human Rights Convention, underlines that imprisonment due to failure to perform a contractual relation will be contrary to the human freedom and honor.
- According to the current laws of in Turkey, the businessmen who are unable to pay their checks are sentenced to imprisonment. If this is their first incident, the person who gives out a kite check is punished with a Judicial Fine equal to the amount written on each kite check and is sentenced to imprisonment only if he/she is unable to pay such Judicial Fine. To be more specific, the Judicial Fines in Turkey are fines that are paid to the Treasury of the State. In case a person indebted to the Treasury of the State because of a Judicial Fine is unable to make this payment within 30 days, he/she is punished by imprisonment for such number of days, which cannot exceed 730, equal to any unpaid amount divided by a figure varying between TL 20,- and 100,- to be determined by the judge based on the financial and other conditions of the debtor.
However, if the incident repeats, the person is then directly sentenced to imprisonment from 1 to 5 years. (linking related: Victims of Cheque (Çek Mağdurları): protest the actions of civil society organizations. )
- Some of the merchants facing these conditions as a result of a penalty contrary to both the European Convention on Human Rights and the human honor commit suicide.
Cheque fraud
Cheques have been a tempting target for criminals to steal money or goods from the drawer, payee or the banks. A number of measures have been introduced to combat fraud over the years. These range from things like writing a cheque so it is difficult to alter after it is drawn, to mechanisms like crossing a cheque so that it can only be paid into another bank's account providing some traceability. However, the inherent security weaknesses of cheques as a payment method, such as having only the signature as the main authenticationAuthentication
Authentication is the act of confirming the truth of an attribute of a datum or entity...
method and not knowing if funds will be received until the clearing cycle to complete, have made them vulnerable to a number of different types of fraud;
Embezzlement
Taking advantage of the float period (cheque kiting) to delay the notice of non-existent funds. This often involves trying to convince a merchant or other recipient, hoping the recipient will not suspect that the cheque will not clear, giving time for the fraudster to disappear.Forgery
Sometimes, forgeryForgery
Forgery is the process of making, adapting, or imitating objects, statistics, or documents with the intent to deceive. Copies, studio replicas, and reproductions are not considered forgeries, though they may later become forgeries through knowing and willful misrepresentations. Forging money or...
is the method of choice in defrauding a bank. One form of forgery involves the use of a victim's legitimate cheques, that have either been stolen and then cashed, or altering a cheque that has been legitimately written to the perpetrator, by adding words and/or digits to inflate the amount.
Identity theft
Since cheques include significant personal information (name, account number, signature and in some countries driver's license number, the address and/or phone number of the account holder), they can be used for fraudFraud
In criminal law, a fraud is an intentional deception made for personal gain or to damage another individual; the related adjective is fraudulent. The specific legal definition varies by legal jurisdiction. Fraud is a crime, and also a civil law violation...
, specifically identity theft
Identity theft
Identity theft is a form of stealing another person's identity in which someone pretends to be someone else by assuming that person's identity, typically in order to access resources or obtain credit and other benefits in that person's name...
. In the US and Canada until recent years the social security number
Social Security number
In the United States, a Social Security number is a nine-digit number issued to U.S. citizens, permanent residents, and temporary residents under section 205 of the Social Security Act, codified as . The number is issued to an individual by the Social Security Administration, an independent...
was sometimes included on cheques. The practice was discontinued as identity theft became widespread.
Dishonoured cheques
A dishonoured cheque cannot be redeemed for its value and is worthless; they are also known as an RDI (returned deposit item), or NSF (non-sufficient fundsNon-sufficient funds
Non-sufficient funds is a term used in the banking industry to indicate that a demand for payment cannot be honored because insufficient funds are available in the account on which the instrument was drawn. In simplified terms, a cheque has been presented for clearance, but the amount written on...
) cheque. Cheques are usually dishonoured because the drawer's account has been frozen or limited, or because there are insufficient funds in the drawer's account when the cheque was redeemed. A cheque drawn on an account with insufficient funds is said to have bounced and may be called a rubber cheque. Banks will typically charge customers for issuing a dishonoured cheque, and in some jurisdictions such an act is a criminal action. A drawer may also issue a stop on a cheque, instructing the financial institution not to honour a particular cheque.
In England and Wales
England and Wales
England and Wales is a jurisdiction within the United Kingdom. It consists of England and Wales, two of the four countries of the United Kingdom...
, they are typically returned marked "Refer to Drawer"—an instruction to contact the person issuing the cheque for an explanation as to why the cheque was not honoured. This wording was brought in after a bank was successfully sued for libel after returning a cheque with the phrase "Insufficient Funds" after making an error—the court ruled that as there were sufficient funds the statement was demonstrably false and damaging to the reputation of the person issuing the cheque. Despite the use of this revised phrase, successful libel lawsuits brought against banks by individuals remained for similar errors.
In Scotland, a cheque acts as an assignment of the amount of money to the payee. As such, if a cheque is dishonoured in Scotland, what funds are present in the bank account are "attached" and frozen, until either sufficient funds are credited to the account to pay the cheque, the drawer recovers the cheque and hands it into the bank, or the drawer obtains a letter from the payee that he has no further interest in the cheque.
A cheque may also be dishonored because it is stale or not cashed within a "void after date". Many cheques have an explicit notice printed on the cheque that it is void after some period of days. In the US, banks are not required by the Uniform Commercial Code
Uniform Commercial Code
The Uniform Commercial Code , first published in 1952, is one of a number of uniform acts that have been promulgated in conjunction with efforts to harmonize the law of sales and other commercial transactions in all 50 states within the United States of America.The goal of harmonizing state law is...
to honour a , which is a cheque presented six months after it is dated.
Lock box
Typically when customers pay bills with cheques (like gas or water bills), the mail will go to a "lock boxLock box
Lock box banking is a service offered by commercial banks that simplifies collection and processing of account receivables by having payments mailed directly to a location accessible by the bank.-General:...
" at the post office. There a bank will pick up all the mail, sort it, open it, take the cheques and remittance advice
Remittance advice
A remittance advice is a letter sent by a customer to a supplier, to inform the supplier that their invoice has been paid. If the customer is paying by cheque, the remittance advice often accompanies the cheque...
out, process it all through electronic machinery, and post the funds to the proper accounts. In modern systems, taking advantage of the Check 21 Act
Check 21 Act
The Check Clearing for the 21st Century Act is a United States federal law, , that was enacted on October 28, 2003 by the 108th Congress. The Check 21 Act took effect one year later on October 28, 2004...
, as in the US, many cheques are transformed into electronic objects and the paper is destroyed.
See also
- AllongeAllongeAllonge , a slip of paper affixed to a negotiable instrument, as a bill of exchange, for the purpose of receiving additional endorsements for which there may not be sufficient space on the bill itself. An endorsement written on the allonge is deemed to be written on the bill itself...
- slip of paper attached to a cheque used to endorse it when there is not enough space. - Blank cheque - cheque where amount have been left blank, figuratively a vague or open ended amount.
- Certified checkCertified checkA certified check or certified cheque is a form of check for which the bank verifies that sufficient funds exist in the account to cover the check, and so certifies, at the time the check is written. Those funds are then set aside in the bank's internal account until the check is cashed or returned...
- guaranteed by a bank. - E-check - electronic fund transfer.
- HundiHundiHundis were legal financial instruments that evolved on the Indian sub-continent. These were used in trade and credit transactions; they were used as remittance instruments for the purpose of transfer of funds from one place to another. In the era of bygone kings and the British Raj these Hundis...
- historic Indian cheque like instrument. - Labour cheque - political concept to distribute goods in exchange for work.
- Negotiable cowNegotiable cowBoard of Inland Revenue v Haddock is a fictitious legal case written by the humorist A. P. Herbert for Punch magazine as part of his series of Misleading Cases in the Common Law. It was first published in book form in More Misleading Cases in the Common Law...
- urban legend where a cow was used as a cheque. - Remote depositRemote depositRemote deposit refers to the ability to deposit a check into a bank account from a remote location, such as an office or home, without having to physically deliver the check to the bank...
- scanning of cheques and transmitting to the bank electronically. - Substitute checkSubstitute checkA substitute check is a negotiable instrument used in the United States to represent the digital reproduction of an original paper check...
- the act of scanning paper cheques and turning them into electronic payments. - Traveler's chequeTraveler's chequeA traveler's cheque is a preprinted, fixed-amount cheque designed to allow the person signing it to make an unconditional payment to someone else as a result of having paid the issuer for that privilege.- Usage :As traveler's cheques can usually be replaced if lost or stolen A traveler's cheque...
- a pre-paid cheque that could be used to make payments in stores.
External links
- Bank and account identifiers on U.S. cheques: ABA / Routing / Transit
- Cheque and Credit Clearing Company—the organisation that manages the cheque clearing system in the UK
- Cheques found in the Cairo Geniza from the 12th century
- Information on cheques in the UK from APACSAPACSThe UK Payments Administration Ltd is a United Kingdom trade organisation that brings together all payment systems organisations and gives banks, building societies and card issuers a forum where they can work together on non-competitive issues...
- Malaysia Introduces New Cheque Clearing System
- Bills of Exchange Act 1882
- Cheques Act 1957
- Canadian Payments Association.
- Cheques Act 1992