Cheques

Cheque: what is it?

The cheque is still quite popular in some countries in the world. According to the latest statistics of the BIS (Bank of International Settlements), the five world’s biggest users of cheques are USA, France, Canada, UK and Australia. Even though the trend shows that the cheque usage is decreasing, the volumes remain significant in those countries. It is certain that the cheque will not completely disappear in the near future. In fact, the cheque is one the oldest mean of payment that is still around. It has evolved a lot since its origination, but the basic principles have not changed that much. If you are interested in the development of means of payments, then you should definitely consider history of the cheque. It gives precious insight into payment evolution and helps to understand in some extent why payment systems are what they are today.

Let’s now look at the common definition of the cheque. The cheque is a writing or a document by which the drawer gives order to the drawee to pay a specific amount of money to the beneficiary. It involves three actors: the drawer, the drawee and the beneficiary. The drawer owns a current account (also called checking account) with a bank where his money is held. The beneficiary is the one who receives the amount paid by the drawee, the bank of the drawer. Both drawer and drawee can be physical persons or legal entities. An example of cheque is visible on the picture below.
Image of a cheque
Example of a cheque
A cheque generally contains the following items (Depending on the country, some of these items may be optional):
  • drawer information: the person or entity who issues the cheque with the address of residence if it is a private person and the office address if it is a business.
  • drawee information: it is the bank or financial institution where the cheque can be presented for payment. Address of the bank is generally indicated.
  • payee: this is the beneficiary of the cheque. The drawer writes the beneficiary’s name in the space provided.
  • date of issue: the date on which the drawer issued the cheque. The date is decisive for the cheque processing.
  • place of issue: the city where the drawer made the cheque.
  • amount and currency: it is the amount to paid by the drawer to the beneficiary. No erasure is allowed on the amount.  An alteration usually invalidates the check and results in rejection by the bank.
  • signature of drawer: it is the formal confirmation provided by the drawer that he has issued the cheque and is giving order to pay.
  • Machine readable routing and account information (MICR): this information is crucial and allows the automation of cheque processing to some extent.
As said above, the definition provided is a common definition. If you want to know what is the cheque in a specific country, you have to read that country’s law regarding cheque. There are specificities from one country to another.
Another interesting observation about cheque is that there are various types of cheques. That will be the topic of a future article. Before looking into that, we want to understand how the cheque processing works and for that we need one of the most powerful tool in payments: the Four Corner Model (for cheque). Let’s consider it in the next article.
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The Four Corner Model for cheque payment

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