A cheque is a document that orders a payment
of money from a bank account. The person writing the cheque, the drawer, has a transaction
banking account where their money is held. The drawer writes the various details including
the monetary 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 money. 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 whoever had it in their possession.
Technically, a cheque is a negotiable instrument 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 persons
or legal entities. Specifically, cheques are order instruments, and are not in general
payable simply to the bearer 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 forms of cheques have been in use
since ancient times and at least since the 9th century, it was during the 20th century
that cheques became a highly popular non-cash method for making payments 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 an increasing number of countries cheques have either become a marginal
payment system or have been completely phased out. Spelling and etymology
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 has become
standard for the financial instrument in the Commonwealth 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.
Etymological dictionaries attribute the financial meaning to come from “a check against forgery,”
with the use of “check” to mean “control” stemming from a check in chess, a term which
came into English through French, Latin, Arabic and ultimately from the Persian word “shah”
or “king.” 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 to purchase goods and services.
Early years In India, during the Mauryan period, 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.
The ancient Romans are believed to have used an early form of cheque known as praescriptiones
in the 1st century BC. Muslim traders are known to have used the
cheque or ṣakk system since the time of Harun al-Rashid of the Abbasid Caliphate.
Transporting a paper saqq was more secure than transporting money. In the 9th century,
a merchant in country A could cash a saqq drawn on his bank in country B.
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
concept went on to 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 had in
the account with a bank 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, scriveners
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. The suppression of banknotes in eighteenth-century England
further promoted the use of cheques. 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 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.
However, countries including the U.S. and members of the British Commonwealth, did not
participate and so it remained very difficult for cheques to be used across country borders.
In 1959 a standard for machine-readable characters 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 cards 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, the Eurocheque system was phased out and replaced with domestic checking systems.
Old eurocheques could still be used, however they were now processed by national checking
systems. At that time, a number of countries such as Germany took the opportunity to phase
out the use of cheques altogether. 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 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. Attached documents Cheques sometimes include additional documents.
A page in a chequebook may consist of both the cheque itself and a stub or counterfoil –
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” 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 custodian
of a brokerage account, the payee will be the custodian, but the cheque may be marked
“FO” 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 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.
Declining use Cheques have been in decline for some years,
both for point of sale transactions and for third party 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 machines 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 cash there are number of other payment systems that have emerged to compete
against cheques; Debit card payments
Credit card payments Direct debit
Direct credit, ACH in US, giro in Europe, Direct Entry in Australia
Wire transfer Electronic bill payments using Internet banking
Online payment services Cryptocurrency
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 giro. 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 or Überweisungen, 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 or Incasso). 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, Austria and the Netherlands, 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, German and Dutch banks issue debit cards instead
of simple ATM cards 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 almost 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 cards.
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 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. 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. In June 2014, following a successful trial
in the UK by Barclays, the British government gave the go-ahead for a cheque photo plan
allowing people to pay in a cheque by simply taking a photo of a it, rather than physically
depositing the paper cheque at a bank. 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 accounts 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 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, such as The Clearing House,
Viewpointe LLC 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. Many people in the US still use paper money orders 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 less than that
of the US and is declining rapidly. The Canadian Payments Association reported that in 2012,
cheque use in Canada accounted for only 40% of total financial transactions. 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
service. Cheques are still widely used for government
cheques, payroll, rent, and utility bill payments, though direct deposits and online/telephone
bill payments are also widely and increasingly used.
The Canadian government has said it will be phasing out all government cheques by April
2016. Asia
In many Asian countries cheques were never widely used and generally only used by the
wealthy, with cash 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 countries in Asia have
seen an increasing use of electronic payment systems, ‘leap-frogging’ the less efficient
chequeing system altogether. India is one of the few countries in Asia
that did have significant cheque usage. It had a long tradition of using cheques and
passed laws to formalise cheque usage as early as 1881. As of 2009 there was still wide usage
of cheques as payment method in trade, and also by individuals when paying other individuals
or for paying 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. In 2009 the Reserve
Bank of India reported there had been five percent decline in cheque usage compared to
the previous year. Oceania
In Australia, following global trends, the use of cheques continues to decline. In 1994
the value of daily cheque transactions was A$25 billion; by 2004 this had dropped to
only A$5 billion, almost all of this for B2B transactions. Personal cheque use is practically
non-existent thanks to the longstanding use of the EFTPOS system, BPAY, Electronic transfers
and debit cards. In New Zealand, payments by cheque have declined
since the mid-1990s in favour of electronic payment methods. In 1993, cheques accounted
for over half of transactions through the national banking system, with an annual average
of 130 cheques per capita. By 2006 cheques lagged well behind EFTPOS transaction and
electronic credits, making up only nine percent of transactions, with an annual average of
41 cheque transaction per capita. Most retail stores no longer accept cheques, and those
that do often require government-issued identification or a store-issued “cheque identification card”
before they can be accepted as payment. 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 cheques and banker’s drafts also
known as a bank cheque, treasurer’s cheque or banker’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
and most of the Commonwealth. 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 sometimes 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 cheque 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.
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 warrants.
Warrants Warrants look like cheques and clear through
the banking system like cheques, but are not drawn against cleared funds in a deposit account.
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 credit or debit cards 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 office, bank or merchant
such as a grocery store 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 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 inches in size, however, according to the Guinness
Book of World Records, the largest ever is 12 by 25 metres. 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 Children, 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.
Cheques around the world 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 Association.
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.
Canada In Canada, cheque sizes and types—as well
as endorsements requirements and MICR tolerances are overseen by the Canadian Payments Association
It is possible to write cheques in currencies that are not in Canadian Dollars.
Canadian cheques can legally be written in English, French or Inuit.
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 by a third party on behalf of
the payer. Under CPA Rules these are prohibited in the clearing system effective 27 January
2004. India
The Cheque was introduced in India by the Bank of Hindustan, the first joint stock bank
established in 1770. In 1881, the Negotiable Instruments 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.
Until 1 April 2012, cheques in India were valid for a period of six months from the
date of their issue, before the Reserve Bank of India issued a notification reducing their
validity to three months from the date of issue.
Japan In Japan, cheques are called Kogitte, and
are governed by Kogitte Law. Bounced cheques are called Fuwatari Kogitte.
If an account owner bounces two cheques in six months, the bank will suspend the account
for two years. If the account belongs to a public company, their stock will also be suspended
from trading on the stock exchange, which can lead to bankruptcy.
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 truncation 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 instruments. Homeguard v Kiwi Packaging is often cited case law regarding
the banking of cheques tendered as full settlement of disputed accounts.
United Kingdom In the UK all cheques must now conform to
“Cheque and Credit Clearing Company Standard 3”, the industry standard detailing layout
and font, be printed on a specific weight of paper, and contain explicitly defined security
features. Since 1995, all cheque printers must be members
of the Cheque Printer Accreditation Scheme. 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” 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 was designated
“T”. At “T + 2” 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
on current accounts or at “T + 6” on savings accounts. “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 close the
centralised cheque clearing 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 United States, cheques are referred
to as checks and are governed by Article 3 of the Uniform Commercial Code, under the
rubric of negotiable instruments. 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.” 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 it was a negotiable order of withdrawal; 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.
Typically the routing number is followed by a group of 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—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, if the account is in one of 49 specific cities, or a state code 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.
The electronic check or substitute check was formally adopted in the US in 2004 with the
passing of the “Check Clearing for the 21st Century Act”. This allowed the creation of
electronic checks and translation of paper checks into electronic replacements, reducing
cost and processing time. Turkey
In Turkey, cheques are usually used for commercial transactions only, and using post-dated cheques
is legally possible. 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 authentication 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 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, forgery 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, they can be used for fraud, specifically
identity theft. In the US until recent years the social security number 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, or NSF 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 stating that they have 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 stale-dated cheque, which is a cheque presented six months after it is dated.
Consumer reporting In the United States some consumer reporting
agencies such as ChexSystems, Early Warning Services, and TeleCheck have been providing
check verification services that track how people manage their checking accounts. Banks
use the agencies to screen checking account applicants. Those with low debit scores are
denied checking accounts because a bank can not afford an account to be overdrawn.
In the United Kingdom, in common with other items such as Direct Debits or standing orders,
dishonoured cheques can be reported on a customer’s credit file, although not individually and
this does not happen universally amongst all banks. Dishonoured payments from current accounts
can be marked in the same manner as missed payments on the customer’s credit report.
Lock box Typically when customers pay bills with cheques,
the mail will go to a “lock box” 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. See also
Allonge – slip of paper attached to a cheque used to endorse it when there is not enough
space. Blank cheque – cheque where amount has been
left blank, figuratively a vague or open ended amount.
Certified check – guaranteed by a bank. E-check – electronic fund transfer.
Hundi – historic Indian cheque like instrument. Labour cheque – political concept to distribute
goods in exchange for work. Negotiable cow – urban legend where a cow
was used as a cheque. Remote deposit – scanning of cheques and transmitting
to the bank electronically. Substitute check – the act of scanning paper
cheques and turning them into electronic payments. Traveler’s cheque – a pre-paid cheque that
could be used to make payments in stores. Notes
Footnotes Citations External links
Cheques found in the Cairo Geniza from the 12th century
Information on cheques in the UK from UK Payments Administration
Malaysia Introduces New Cheque Clearing System Bills of Exchange Act 1882
Cheques Act 1957 Cheques Act 1992