A CHEQUE or check is a document (usually a piece of paper) that orders a payment of money. The person writing the cheque, the drawer, usually has a chequing account where their money is 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 instructing a financial institution to pay a specific amount of a specific currency from a specified transactional account held in the drawers 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 (as bearer instruments are) but must be paid to the payee. In some countries, such as the U.S., 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 were issued each year with volumes peaking in or around the early 1990s. 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. 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 and other territories in the Persian Sassanid Empire issued letters of credit known as chak (In New Persian script:In Shahnameh there are several mentions of use of chak and in post-Islamic Arabic document this word appears as Arabicised akks. Moslem traders are known to have used the cheque or akk 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. 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 was subsequently adopted in France, and from there the practice was brought to England.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.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. 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, 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. Many European and South American states, as well as, Japan joined the convention. However, all members of the common law including 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 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, that they had used as their domestic chequing system, ceased Jan.1,2002. 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.Parts of a cheque based on a UK example 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, and 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 U.S. 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 U.S., 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 U.S., 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 countrys 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.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 United States. There may also be a beneficiaryfor example, in depositing a cheque with a custodian 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 payees account, or in some circumstances may be a third party to whom the payee owes or wishes to give money.Cheques may be valid regardless of denomination and are used within numerous scenarios in place of cash. A payee that accepts a cheque will typically deposit it in an account at the payees 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 holders 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. An advantage to the drawer of using cheques instead of debit card transactions is that they know the drawers bank will not release the money until several days later. Paying with a cheque and making a deposit before it clears the drawers bank is called kiting or floating and is generally illegal in the United States, 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 many years, both for point of sale transactions (for which credit cards and debit cards are increasingly preferred) and for third party payments (e.g. 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 machines (ATMs) has led to an era of easy access to cash, which make the necessity of writing a cheque to someone because the banks were closed a thing of the past.Alternatives to cheques In addition to Cash there are number of other payment systems that have emerged to compete against cheques:Debit card paymentsCredit card paymentsDirect debit (initiated by payee)Direct credit (initiated by payer), ACH in US, Giro in EuropeWire transfer (local and international)Electronic bill payments using Internet bankingOnline payment services (for example PayPal and WorldPay).Cashiers cheque Cashiers cheques and bankers drafts also known as a bank cheque or treasurers cheque, are cheques issued against the funds of a financial institution rather than an individual account holder. Typically, the term cashiers cheques are used in the U.S. and bankers 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. Cashiers 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 cheque is drawn, the bank operating the account verifies there are currently sufficient funds in the drawers account to honour the cheque. Those funds are then set aside in the banks 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).Payroll chequeA 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 supplies. In this case they are an instruction to the entitys treasurer department to pay the warrant holder on demand or after a specified maturity date.Travellers cheque A travellers 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. Travellers 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 travellers cheques as currency. The use of credit or debit cards has, however, begun to replace the travellers 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 travellers cheques.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 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 (46 × 91 cm) in size, however, according to the Guinness Book of World Records, the largest ever is 12 by 25 metres (39 × 82 ft).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 Some public assistance programmes such as the Special Supplemental Nutrition Programme 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.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 its hard for to be altered after it is drawn to mechanisms like crossing a cheque so that it can only be paid into another banks 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 (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, forgery is the method of choice in defrauding a bank. One form of forgery involves the use of a victims 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 in order to inflate the amount.Identity theft Since cheques include significant personal information (name, account number, signature and in some countries drivers license number, the address and/or phone number of the account holder), they can be used for fraud, specifically identity theft. In the U.S.A and Canada 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 (returned deposit item), or NSF (non-sufficient funds) cheque. Cheques are usually dishonoured because the drawers account has been frozen or limited, or because there are insufficient funds in the drawers 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 Draweran 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 errorthe 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. However, 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 dishonoured 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 United States, 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.
Click here to read full news..
