Cheque
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A cheque or check (American English) is a piece of paper (usually) 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, know 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 whoever 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 demand account held in the drawer/depositor's name with that institution. Both the drawer and payee may be natural persons or legal entities.
Although cheques have been around since at least 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.
Etymology and spelling
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Numismatics
Terminology
Portal
Currency
Circulating currencies
Community currencies
Ancient currencies
Byzantine
Production
Exonumia
The spellings check, checque, and cheque were used interchangeably from the 1600s until the 1900s. However, since the 1800s, the spelling cheque (from the French word chèque) has become standard for the financial instrument in the Commonwealth and Ireland, while check is used only for the verb "to verify", thus distinguishing the two definitions in writing.
In American English, 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 (e.g. gold) to purchase goods and services. A draft is a bill of exchange which is not payable on demand of the payee. (However, draft in the U.S. 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.)
Early years
The ancient Romans are believed to have used an early form of cheque known as praescriptiones in the first century BC. 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 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. 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.
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 introduce 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 1800s a number of countries formalised laws around cheques. The UK passing the Bills of Exchange act in 1882 which 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 the members of the common law including the United States and the members of Commonwealth 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. At that time electronic payment methods started to become popular and as a result cheque usage started to decline.
In 1969 cheque guarantee card were introduced in some countries, this allowed a retailer to confirm that a cheque would be honoured when they were used to pay at point of sale. This was done by having the drawer sign the cheque in front of the retailer so it could be compared to the signature on the card and them writing the cheque guarantee card number of the back of the cheque. These were generally phased out and replaced by debit cards starting in the mid 1990s.
Starting in the mid 1990s a number of countries enacted laws to allow for cheque truncation, this is where a physical cheque is converted into electronic form for transmission to the paying bank or clearing house. This eliminated the cumbersome physical presentation and saved time and processing costs. However a number of countries decided that implementation costs could not be justified at a time when alternative electronic payment systems were emerging.
In 2002, Germany and a number of other European countries phased out the use of cheques altogether when the Eurocheque system, that they had used as their domestic checking system, ceased 1 Jan 2002. By 2010 a number of countries had phased out the use of cheques and most others signalled that they would end their use in the following years.
Parts of a cheque
- drawee, the financial institution where the cheque can be presented for payment
- payee
- date of issue
- amount of currency
- drawer, the person or entity making the cheque
- signature of drawer
- Machine readable routing and account information
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 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.
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 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.
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 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.