Cheque

A cheque (or check in American English) is a document/instrument (usually a piece of paper[nb 1]) that orders a payment of money. The person writing the cheque,

the drawer, usually has a chequing account 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 this 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 around large amounts of gold and silver. Paper

money also evolved from bills of exchange, and are similar to cheques in that they are a written order to pay the given amount to whomever had it in their

possession (the "bearer").

Technically, a cheque is a negotiable instrument[nb 2] 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 orlegal entities. Specifically, cheques are order

instruments, and are not in general payable simply to the bearer (as bearer instruments are) but must be paid to the payee. In some countries, such as the US, the

payee must endorse the cheque first, giving them the possibility to specifying a third party to whom it should be paid.

Although cheques have been around since at least 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 each year with volumes peaking in or around the early 1990s.[1] Since that time cheque usage has seen significant decline as electronic payment systems

started to replace physical cheques. In a number of countries cheques have become a marginal payment system or have been phased out completely.

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 (e.g. gold) to purchase goods and services.

[edit]Early years

The ancient Romans are believed[5] 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.[6]

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 ṣakks or ّ‫)صک‬.

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.[7]

Between 1118 and 1307, it is believed the Knights Templar introduced a cheque system for pilgrims travelling to theHoly Land or across Europe.[8] The pilgrims

would deposit funds at one chapter house, then withdraw it from another chapter at their destination by showing a draft of their claim. These drafts would be

written in a very complicated code only the Templars could decipher.

In the 13th century in Venice bills of exchange was developed as a legal device to allow international trade without the need to carry around large amounts

of gold and silver. Their use subsequently spread to other European countries.

In the early 1500s in the Dutch Republic in order to protect their large accumulations of cash, people began to depositing their money with "cashiers". These

cashiers held the money for a fee. Competition drove cashiers to offer additional services including paying out money to any person bearing a written order from a

depositor to do so. They kept the note as proof of payment.

[edit]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. They were

initially known as ‘drawn notes’ as they enabled a customer to draw on the funds they held on account with their banker and required immediate payment.[9] These

were hand written 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 would have to be brought back to the bank for settlement.

Up until around 1770 an informal exchange of cheques took place between London Banks. Clerks of each bank visited all of the other banks to exchange

cheques, whilst keeping a tally of balances between them until they settled with each other. Daily cheque clearings 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 is thought to have been the first bank to personalise its customers cheques, by printing the name of the account holder

vertically along the left-hand edge.[10] In 1830 the Bank of England introduced books of 50, 100 or 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 a number of countries formalised laws around cheques. The UK passing the Bills of Exchange act in 1882, India passed the Negotiable

Instruments Act (NI Act) 1881[6] which both covered cheques.

In 1931 an attempt was made to simplify the international use of cheques with the Geneva Convention on the unification of the law relating to cheques.[11] Many

European and South American states as well as Japan joined the convention. However, all members of the common lawincluding the United States and members

of the Commonwealth of Nations did not participate.

In 1959 a standard for machine readable characters (MICR) was agreed and patented in the United States for use with cheques. This opened the way for the first

automated reader/sorting machines for clearing cheques. The following years saw a dramatic change in the way that cheques were handled and processed as

automation increased. Cheque volumes continued to grow, and in the late 20th century cheques became 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

started to become popular and cheques usage started to declined.

In 1969 cheque guarantee cards were introduced in a number of 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 of the back of the cheque. Such cards were generally phased out and replaced bydebit 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, that they had used as their

domestic chequing system, ceased 1 Jan 2002. As of 2010, many countries have either phased out the use of cheques all together or signaled that they would

end their use in the following years.

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 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;[12] in Australia this is typically fifteen months.[13] 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.
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.
[edit]Cashier’s cheques and bank drafts
Main article:  Cashier's check

Cashier's cheques and banker's drafts 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.
[edit]Certified cheque
Main article:  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, in this manner,
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).
[edit]Payroll cheque
Main article:  Payroll#Paycheck

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.
[edit]Warrants

Main article:  Warrant (of payment)

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.[24] They are often issued by government entities such as the
military to pay wages or supplies. 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.
[edit]Travellers cheque
Main article:  Traveller's 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, however, 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.
[edit]Money or postal order
Main articles: Money order and Postal order

A cheque sold by a post office or merchant such as a grocery for payment by a third party for a customer is
referred to as a money order orpostal 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.
[edit]Oversized cheques

Presentation of the Ansari X Prize $10 million award

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 (46 × 91 cm) in size,[25] however,
according to the Guinness Book of World Records, the largest ever is 12 by 25 metres (39 × 82 ft).
[26]
 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.[27] A bank may levy additional charges for clearing an oversized cheque.
[edit]Payment vouchers

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.
[edit]