Traveler's cheque

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Obverse and reverse side of traveller's cheque of National Bank of Poland (nominal value: 1000 Polish zloty); sold in April 1989 in Budapest (Hungary), for use during travel to Poland only, never used. Czek.podrozniczy.1000zl.NBP.1989.jpeg
Obverse and reverse side of traveller's cheque of National Bank of Poland (nominal value: 1000 Polish złoty); sold in April 1989 in Budapest (Hungary), for use during travel to Poland only, never used.

A traveller's cheque [lower-alpha 1] is a medium of exchange that can be used in place of hard currency. They can be denominated in one of a number of major world currencies and are preprinted, fixed-amount cheques designed to allow the person signing it to make an unconditional payment to someone else as a result of having paid the issuer for that privilege.

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They are generally used by people on vacation in foreign countries instead of cash, as many businesses used to accept traveller's cheques as currency. The incentive for merchants and other parties to accept them lies in the fact that as long as the original signature (which the buyer is supposed to place on the cheque in ink as soon as they receive the cheque) and the signature made at the time the cheque is used are the same, the cheque's issuer will unconditionally guarantee payment of the face amount even if the cheque was fraudulently issued, stolen, or lost. This means that a traveller's cheque can never 'bounce' unless the issuer goes bankrupt and out of business. If a traveller's cheque were lost or stolen, it could be replaced by the issuing financial institution.

The financial institutions issuing traveller's cheques earn income in a number of ways. Firstly, they charge a fee on sale of such cheques. In addition, they can earn interest for the period that the cheques are uncashed, while not paying any interest to the cheque holder, making them effectively interest-free loans. Also, the foreign exchange rate commonly used on traveller's cheques (generally based on rates applicable at the time of purchase) is less favourable compared to other forms of obtaining foreign currency, especially those on credit card transactions (which use a rate applicable at the statement date). In addition, the setup cost and the cost of issuing and processing traveller's cheques is much higher than for credit card transactions. The cheque issuer carries the exchange rate risk, and normally pays a fee to hedge against the risk.

Their use has been in decline since the 1990s, when a variety of more convenient alternatives, such as credit cards, debit cards, pre-paid currency cards and automated teller machines, became more widely available and easier for travellers to use. Traveller's cheques are no longer widely accepted and cannot easily be cashed, even at the banks that issued them. The alternatives to traveller's cheques are generally cheaper and more flexible. Travel money cards, for instance, provide features similar to traveller's cheques but offer greater ease and flexibility.

Terminology

Legally, the parties to traveller's cheque transactions are as follows. The organization that produces a traveller's cheque is the obligor or issuer. The bank or other place that sells it is the agent of the issuer. The natural person who buys the cheque is the purchaser. The entity to whom the purchaser hands the cheque in payment for goods or services is the payee or merchant. For purposes of clearance, the obligor is both maker and drawee.

History

Traveller's cheques were first issued on 1 January 1772 by the London Credit Exchange Company for use in 90 European cities, [1] and in 1874, Thomas Cook was issuing "circular notes" that operated in the manner of traveller's cheques. [2]

American Express developed a large-scale international traveller's cheque system in 1891, to supersede the traditional letters of credit. [3] It is still the largest issuer of traveller's cheques today by volume. American Express's introduction of traveller's cheques is traditionally attributed to employee Marcellus Flemming Berry, after company president J. C. Fargo had problems in smaller European cities obtaining funds with a letter of credit.

Between the 1850s and the 1990s, traveller's cheques became one of the main ways that people took money on vacation for use in foreign countries without the risks associated with carrying large amounts of cash.

Several brands of travellers cheques have been marketed; the most familiar of those were Thomas Cook Group, Bank of America and American Express.

Declining use

The convenience and wider acceptance of such alternatives as credit and debit cards and the wider availability of ATMs has led to a significant decline in the use of traveller's cheques since the 1990s. In addition, security concerns of retailers has led to many businesses ceasing to accept them, in turn making them less attractive to travellers. This has led to complaints about the difficulty that holders have in using them. In much of Europe and Asia, traveller's cheques are no longer widely accepted and cannot be easily cashed, even at the banks that issued them.[ citation needed ]

Since traveller's cheques do not earn interest, one of the main incentives financial institutions have to sell traveller's cheques is that they effectively represent an interest-free loan from the purchaser to the seller. The sustained decline in interest rates in most of the developed world since the early-to-mid 1990s has substantially reduced the profitability of traveller's cheques for their issuers. Financial institutions have responded to this development by charging new fees for traveller's cheques, increasing existing fees, or by exiting the business altogether.[ citation needed ]

Usage

Purchasing cheques for later use

Travellers' cheques are sold by banks and agencies to customers for use at a later time. Upon obtaining custody of a purchased supply of traveller's cheques, the purchaser immediately signs each cheque. The purchaser also receives a receipt and other documentation that should be kept in a safe place other than where they carry the cheques. Traveller's cheques can usually be replaced if lost or stolen, assuming the owner still has the receipt issued with the purchase of the cheques showing the serial numbers allocated.

Cashing cheques

To cash a traveller's cheque to make a purchase, the purchaser would, in the presence of the payee, date and countersign the cheque in the indicated space. [4]

Denomination and change

Traveller's cheques are available in several currencies such as U.S. dollars, Canadian dollars, pounds sterling, Japanese yen, Chinese yuan and euros; denominations usually being 20, 50, or 100 (x100 for yen) of whatever currency, and are usually sold in pads of five or ten cheques, e.g., 5 × €20 for €100. Traveller's cheques do not expire, so unused cheques can be kept by the purchaser to spend at any time in the future. The purchaser of a supply of traveller's cheques effectively gives an interest-free loan to the issuer, which is why it is common for banks to sell them "commission free" to their customers. The commission, where it is charged, is usually 1–2% of the total face value sold.

Any change for a purchase transaction would be given in the local currency.

Deposit and settlement

A payee receiving a traveller's cheque would follow its normal procedures for depositing cheques into its bank account: usually, endorsement by stamp or signature and listing the cheque and its amount on the deposit slip. The bank account will be credited with the amount of the cheque as with any other negotiable item submitted for clearance.

In the United States, if the payee is equipped to process cheques electronically at point of sale (see: Check 21 Act), they would still take custody of the cheque and submit it to a financial institution, particularly to avoid any confusion on the part of the purchaser.

Security issues

One of the main advantages traveller's cheques provide is the replacement if lost or stolen.

However, this feature has also created a black market where fraudsters buy traveller's cheques, sell them at 50% of their value to other people (such as travellers) and falsely report their traveller's cheque stolen with the company from which the cheque was obtained. As such, they get back the value of the traveller's cheque and make 50% of the value as profit. [5]

The widespread problem of counterfeit traveller's cheques has caused a number of businesses to no longer accept them or to impose stringent safeguards when they are used. It is a reasonable security procedure for the payee to ask to inspect the purchaser's picture ID; a driver's license or passport should suffice, and doing so would most usefully be towards the end of comparing the purchaser's signature on the ID with those on the cheque. The best first step, however, that can be taken by any payee who has concerns about the validity of any traveller's cheque, is to contact the issuer directly; a negative finding by a third-party cheque verification service based on an ID cheque may merely indicate that the service has no record about the purchaser (to be expected, practically by definition, of many travellers), or at worst that they have been deemed incompetent to manage a personal chequing account (which would have no bearing on the validity of a traveller's cheque).

Some purchasers have found the process of filing a claim for lost or stolen cheques is cumbersome, and have been left without recourse after their cheques were lost or stolen. [6]

Alternatives

The widespread acceptance of credit cards and debit cards around the world starting in the 1980s and 1990s significantly replaced the use of traveller's cheques for paying for things on vacation.

In 2005, American Express released the American Express Travellers Cheque Card, a stored-value card that serves the same purposes as a traveller's cheque, but can be used in stores like a credit card. It discontinued the card in October 2007. A number of other financial companies went on to issue stored-value or pre-paid debit cards containing several currencies that could be used like credit or debit cards at shops and at ATMs, mimicking the traveller's cheque in electronic form. One of the major examples is the Visa TravelMoney card. [7]

See also

Related Research Articles

A debit card is a plastic payment card that can be used instead of cash when making purchases. It is similar to a credit card, but unlike a credit card, the money is immediately transferred directly from the cardholder's bank account when performing any transaction.

EFTPOS Type of electronic payment system

Electronic funds transfer at point of sale is an electronic payment system involving electronic funds transfers based on the use of payment cards, such as debit or credit cards, at payment terminals located at points of sale. EFTPOS technology originated in the United States in 1981 and was adopted by other countries. In Australia and New Zealand, it is also the brand name of a specific system used for such payments; these systems are mainly country-specific and do not interconnect.

Stored-value card

A stored-value card (SVC) is a payment card with a monetary value stored on the card itself, not in an external account maintained by a financial institution. This means no network access is required by the payment collection terminals as funds can be withdrawn and deposited straight from the card. Like cash, payment cards can be used anonymously as the person holding the card can use the funds. They are an electronic development of token coins and are typically used in low-value payment systems or where network access is difficult or expensive to implement, such as parking machines, public transport systems, closed payment systems in locations such as ships or within companies.

A transaction account, also called a checking account, chequing account, current account, demand deposit account, or share draft account at credit unions, is a deposit account held at a bank or other financial institution. It is available to the account owner "on demand" and is available for frequent and immediate access by the account owner or to others as the account owner may direct. Access may be in a variety of ways, such as cash withdrawals, use of debit cards, cheques (checks) and electronic transfer. In economic terms, the funds held in a transaction account are regarded as liquid funds. In accounting terms they are considered as cash.

Money order

A money order is a payment order for a pre-specified amount of money. As it is required that the funds be prepaid for the amount shown on it, it is a more trusted method of payment than a cheque.

Cheque clearing

Cheque clearing or bank clearance is the process of moving cash from the bank on which a cheque is drawn to the bank in which it was deposited, usually accompanied by the movement of the cheque to the paying bank, either in the traditional physical paper form or digitally under a cheque truncation system. This process is called the clearing cycle and normally results in a credit to the account at the bank of deposit, and an equivalent debit to the account at the bank on which it was drawn, with a corresponding adjustment of accounts of the banks themselves. If there are not enough funds in the account when the cheque arrived at the issuing bank, the cheque would be returned as a dishonoured cheque marked as non-sufficient funds.

Bank fraud is the use of potentially illegal means to obtain money, assets, or other property owned or held by a financial institution, or to obtain money from depositors by fraudulently posing as a bank or other financial institution. In many instances, bank fraud is a criminal offence. While the specific elements of particular banking fraud laws vary depending on jurisdictions, the term bank fraud applies to actions that employ a scheme or artifice, as opposed to bank robbery or theft. For this reason, bank fraud is sometimes considered a white-collar crime.

Financial transaction

A financial transaction is an agreement, or communication, carried out between a buyer and a seller to exchange an asset for payment.

A giro transfer, often shortened to giro ,, is a payment transfer from one bank account to another bank account and initiated by the payer, not the payee. The debit card has a similar model. Giros are primarily a European phenomenon; although electronic payment systems such as the Automated Clearing House exist in the United States and Canada, it is not possible to perform third party transfers with them. In the European Union, there is the Single Euro Payments Area (SEPA) which allows electronic giro or debit card payments in euros to be executed to any euro bank account in the area.

The Australian financial system consists of the arrangements covering the borrowing and lending of funds and the transfer of ownership of financial claims in Australia, comprising:

Digital currency

Digital currency is a balance or a record stored in a distributed database on the Internet, in an electronic computer database, within digital files or within a stored-value card. Examples of digital currencies include cryptocurrencies, virtual currencies, central bank digital currencies and e-Cash.

Cheque

A cheque, or check, is a document that orders a bank to pay a specific amount of money from a person's account to the person in whose name the cheque has been issued. The person writing the cheque, known as the drawer, has a transaction banking account where their money is held. The drawer writes the various details including the monetary amount, date, and a payee on the cheque, and signs it, ordering their bank, known as the drawee, to pay that person or company the amount of money stated.

A Direct Debit or direct withdrawal is a financial transaction in which one person withdraws funds from another person's bank account. Formally, the person who directly draws the funds instructs his or her bank to collect an amount directly from another's bank account designated by the payer and pay those funds into a bank account designated by the payee. Before the payer's banker will allow the transaction to take place, the payer must have advised the bank that he or she has authorized the payee to directly draw the funds. It is also called pre-authorized debit (PAD) or pre-authorized payment (PAP). After the authorities are set up, the direct debit transactions are usually processed electronically.

Overdraft occurs when money is withdrawn from a bank account and the available balance goes below zero

An overdraft occurs when money is withdrawn from a bank account and the available balance goes below zero. In this situation the account is said to be "overdrawn". If there is a prior agreement with the account provider for an overdraft, and the amount overdrawn is within the authorized overdraft limit, then interest is normally charged at the agreed rate. If the negative balance exceeds the agreed terms, then additional fees may be charged and higher interest rates may apply.

A payment is the voluntary tender of money or its equivalent or of things of value by one party to another in exchange for goods, or services provided by them, or to fulfill a legal obligation. The party making a payment is commonly called the payer, while the payee is the party receiving the payment.

Payment card

Payment cards are part of a payment system issued by financial institutions, such as a bank, to a customer that enables its owner to access the funds in the customer's designated bank accounts, or through a credit account and make payments by electronic funds transfer and access automated teller machines (ATMs). Such cards are known by a variety of names including bank cards, ATM cards, MAC, client cards, key cards or cash cards.

NETS (company)

Network for Electronic Transfers or more commonly known as NETS; is a Singaporean electronic payment service provider founded in 1985 by a consortium of local banks to establish the debit network and drive the adoption of electronic payments in Singapore. It is owned by DBS Bank, OCBC Bank and United Overseas Bank (UOB).

Credit card card for financial transactions from a line of credit

A credit card is a payment card issued to users (cardholders) to enable the cardholder to pay a merchant for goods and services based on the cardholder's promise to the card issuer to pay them for the amounts plus the other agreed charges. The card issuer creates a revolving account and grants a line of credit to the cardholder, from which the cardholder can borrow money for payment to a merchant or as a cash advance.

Bank Financial institution that accepts deposits

A bank is a financial institution that accepts deposits from the public and creates a demand deposit while simultaneously making loans. Lending activities can be performed either directly or indirectly through capital markets.

Alternative payments refers to payment methods that are used as an alternative to credit card payments. Most alternative payment methods address a domestic economy or have been specifically developed for electronic commerce and the payment systems are generally supported and operated by local banks. Each alternative payment method has its own unique application and settlement process, language and currency support, and is subject to domestic rules and regulations.

References

  1. Alternatively spelt as traveller's check, particularly in American English. See also American and British English spelling differences.
  1. "On this day – January 3". thisislancashire.co.uk. Archived from the original on October 15, 2008.
  2. "Home" (PDF). competition-commission.gov.uk. Competition Commission. Archived from the original (PDF) on 2012-01-06. Retrieved 2014-03-23.
  3. "Host with the Most" . Time . 9 April 1956.
  4. "Accepting American Express Travelers Cheques – watch out for fraud". American Express . Retrieved July 17, 2012.
  5. Handboek voor de kWereldreiziger by Frans Timmerhuis
  6. "Top 31 Complaints and Reviews about American Express Travelers Cheques". Consumeraffairs.com. Retrieved 2014-03-23.
  7. "Visa TravelMoney Cards". europeforvisitors.com. Retrieved January 3, 2011.