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Typical cancelled personal cheque as used in the U.S.
A cheque (CwE) or check (AmE), thought to have developed from Persian چك chek, is a negotiable instrument instructing a financial institution to pay a specific amount of a specific currency from a specific demand account held in the maker/depositor's name with that institution. Both the maker and payee may be natural persons or legal entities.
During the first century A.D., banks in the Persia (Iran) and other territories in Persian empire under Sassanid dynasty issued letters of credit known as Sakks. They are considered the basis for the modern cheque.
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 payable on demand of the payee.
The cheque was originally called a "check" in reference to the counterfoil used to check against forgery and alterations. The spelling "cheque" seems to have been introduced by J. W. Gilbart in 1828 (A practical treatise on banking, 2nd ed, 1828, Effingham Wilson, London). He explains in a footnote 'Most writers spell it check. I have adopted the above form because it is free from ambiguity and is analogous to the ex-chequer, the royal treasury. It is also used by the Bank of England "Cheque Office"'. According to Holden, the older spelling survived in some English text-books in the 1920s (M J Holden, History of Negotiable Instruments in English Law, 1955, University of London Press, London).
The older spelling is more common in the USA, but the UK and most Commonwealth countries have adopted the newer form "cheque".
A cheque shall contain:
A cheque is generally valid for six months after the date of issue unless otherwise indicated, but this varies depending on where the cheque is drawn. In Australia, for example, it is fifteen months. Legal amount (amount in words) is also highly recommended but not strictly required.
In the United States, cheques are governed by Article 3 of the Uniform Commercial Code.
In the United States, the terminology for a cheque varies with the type of financial institution on which it is drawn. In the case of a savings and loan association it is a negotiable order of withdrawal; if a credit union it would be a share draft. Cheques as such are associated with chartered commercial banks, but under Article 3, and thus in common usage, cheque is understood to mean any or all of these negotiable instruments.
Parties to regular cheques generally include a maker, 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 maker issues the cheque. Ultimately there is also at least one indorsee which would typically be the financial institution servicing the payee's account, or in some circumstances may be a third party to whom the payee owes or wishes to give money.
A payee that accepts a cheque will typically deposit it in an account at the payee's bank, and have the bank process the cheque. In some cases, the payee will take the cheque to a branch of the drawee bank, and cash the cheque there. If a cheque is refused at the drawee bank (or the drawee bank returns the cheque to the bank that it was deposited at) because there are insufficient funds for the cheque to clear, it is said that the cheque has bounced.
When a maker directs the maker's bank to deduct the funds for the amount of a cheque from the maker's account, thus guaranteeing funds will be available for the cheque to clear, and the bank indicates this fact by making a notation on the face of the cheque (technically called an acceptance), the instrument is then referred to as a certified cheque.
A cheque used to pay wages due is referred to as a payroll cheque. 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.
A travelers 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. Travelers cheques can usually be replaced if lost or stolen, they are often used by people on vacation instead of cash. The use of credit or debit cards has, however, begun to replace the travelers cheque as the standard for vacation money, with an increase in usage by spenders due to ease of use, and an increase of businesses preferring transfers of this kind over travelers cheques. This has resulted in some businesses to no longer accept travelers cheques as currency.
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.
A cheque issued by a bank on its own account for a customer for payment to a third party is called a cashier's cheque, a treasurer's cheque or a bank cheque. A cheque issued by a bank but drawn on an account with another bank is a teller's cheque.
In addition to issuing cashier's and teller's cheques, banks often sell money orders, and travelers cheques are usually purchased from banks.
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 program. The voucher can be deposited like any other cheque by a participating supermarket or other approved business.
Paper checks have a major advantage to the maker over [debit card] or [check card] transactions in that the maker's bank will release the money several days later. Paying with a check and making a deposit before it clears the maker's bank is called "Kiting" and is generally illegal, but rarely enforced unless the maker uses multiple checking accounts with multiple institutions to increase the delay or to steal the funds.
Banks are pushing consumers to adopt debit cards and check cards, which are more closely related to secured credit cards than checks. Banks prefer cards to checks because card transactions require funds verification prior to the completion of the transaction. In theory, this should prevent overdrafts but in reality, many banks have adopted authorization policies that permit transactions well in excess of the available account balance. This practice has probably increased overdrafting compared to traditional checks, because the maker does not have the opportunity to make a deposit before the check clears. A [petition] is currently being circulated in the United States asking Congress to prohibit banks from charging overdraft fees on electronically authorized transactions like credit, debit, ATM, online, and other electronic funds transfer methods. If the proposed legislation should pass, Check Card transactions would truly be much safer than paper checks.
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.
In some European countries, for example Germany, Switzerland and Scandinavian countries, cheques are now very rarely used, even for third party payments. In these countries, it is standard practice for businesses to publish their bank details on invoices in order to facilitate the receipt of payments. Even before the introduction of online banking, it has been possible in some countries to make payments to third parties using ATMs. One of the essential procedural differences is that with a cheque, the onus is on the payee to initiate the payment in the banking system, whereas with a bank transfer, the onus is on the payer to effect the payment.
In the United Kingdom and France, there is still a heavy reliance on cheques by some sectors of the population, partly because cheques remain free of charge to personal customers, but bank-to-bank transfers are increasing in popularity. Since 2001, businesses in the United Kingdom have made more electronic payments than cheque payments [1]. In a bid to discourage cheques, most utilities in the United Kingdom charge higher prices to customers who choose to pay by a means other than direct debit, even if the customer pays by another electronic method. Many shops in France no longer accept cheques as a means of payment, and Shell announced in September 2005 that it would no longer accept cheques in its UK petrol stations [2]. Cheques are now widely predicted to become a thing of the past in the United Kingdom [3].
Despite being one of the world's most developed countries, the United States still relies heavily on cheques, caused by the absence of a high volume system for low value electronic payments. When sending a payment by online banking in the United States, the sending bank usually mails a cheque to the payee's bank rather than sending the funds electronically. This is changing rapidly, however, and certain companies with whom a person pays with a cheque will turn that check into an [Automated Clearing House|ACH] or electronic transaction.