The different types of bank cheques

There are numerous types of bank cheques. The first question that may come to one’s mind is: why? why the need for many different types of bank cheques? It is simply because the regular cheque (or order cheque) does not fit in all situations as we will see below. Some types of bank cheques were created to address specific needs (Traveller’s cheque for Tourism for example). Others were created because the regular cheque could not be used to ensure the beneficiary that he would receive the funds (Bank cheque or certified cheque for example). In the following the different types of bank cheques will be presented. The list is not exhaustive, but it contains the most popular types of bank cheques that are in use in many countries.

Order Cheque

This is the most common type of bank cheque. An order cheque is payable to the person specified as the beneficiary. If the cheque can be endorsed or transferred to someone else, then it will be paid the person to whom it is endorsed. Depending on the country’s regulation, order cheques may not be endorsed at all and must be paid to the beneficiary as indicated by the drawer.

Unless specified otherwise, a cheque is considered as an order cheque.

Bearer Cheque also called open cheque

A cheque that is payable to whoever bears it, is called bearer cheque. Generally a beneficiary name is written on the cheque followed by the printed words “or bearer”. The cheque is therefore payable to the beneficiary or to any other person who presents it to the bank for payment. A bearer cheque can be negotiated or transferred to another person by mere delivery. No need to endorse the cheque. This puts a risk on bearer cheques. In case of loss, the finder of the cheque can collect payment from the bank. That is the reason why this type of cheque is seldom used.

Bank cheque

It is a cheque that is issued by the drawee (drawer’s bank) itself. When the check is issued, the bank debits the drawer’s account for the amount of the check (+ applicable fees) and puts the funds on one of its accounts. The beneficiary of the check is thus guaranteed that the cheque will not bounce. When the amounts involved are high, the beneficiary of a cheque may require a bank cheque. A car dealer may require a bank cheque for example because he does not want to take the risk of non payment due a cheque rejection. Nevertheless,  It is possible to counterfeit or forge a bank cheque. And the beneficiary must ensure its authenticity before acceptance. Bank cheques are also called cashier’s cheques or bank drafts.

In some countries, bank checks have a high-quality watermark comparable to that found on bank notes and IDs. The pattern is embedded in the paper and not printed on it, to avoid forgery.

Certified cheque

Unlike bank cheques that are issued by a bank, the certified cheque is issued by the drawer. But the drawer asks the drawee (his bank) to put a mention of certification on the cheque. Before certifying the check, the bank verifies that sufficient funds exist in the account to cover the cheque and set the amount aside. In some countries, the amount is blocked during a limited period. The beneficiary of the check must therefore cash the cheque quickly if he does not want to lose the guarantee of payment. In other countries, the amount is blocked forever and  the certified cheque cannot bounce.

Letter-cheque

It is issued exclusively by businesses, professionals and associations. It consists of a letter of correspondence and a detachable check. It has the advantage of bearing the logo of the company or the association and therefore serves as an advertising medium. It can be completed by handwriting or using computer software. Finally, the check letter can be used in a multitude of situations: supplier payments, payment of benefits or reimbursement of expenses, salary payments, reimbursement of orders or promotional, etc.

Traveler’s cheque

This is a pre-printed check, at the fixed amount, issued by a bank or other financial institution to someone, who plans to undertake a trip, to enable him to make simple payments in the country where he goes. Travelers checks are in most cases in a currency different from that of the beneficiary’s country. The bank usually charges very little for issuing these checks. As a security measure, the beneficiary is asked to sign the checks upon issue and to sign them when making the payments.

Blank Cheque

It is a cheque on which the drawer puts his signature and leaves all other items blank for the payee to fill them in.  This practice is not recommended at all by banks and is sometimes even prohibited. The drawer must have a very high level of trust to the payee to do that. And when the cheque is issued, the payee might know exactly how  much money he needs from the payer. Blank cheques teach us that there is one item on the cheque that must be put by the drawer and only by the drawer: the signature. All other items might be written by someone else and the cheque will still be valid and cashable.

Backdated Cheque

A cheque is anti-dated when it bears is a date weeks or even months earlier than the date on which it is presented to the bank. A drawer might backdate a cheque because he is writting it in the future and the cheque had to be issued before a certain date. This is fine as long as the cheque remains in the validity period. Few years ago, I bought shares from a mutual funds and had to backdate the cheque. The cheque had to be issued by December 31th of the previous year. I forgot to send it with my subcription application and the Mutual funds asks me to backdate the cheque. My application would have been rejected otherwise.

Postdated Cheque

A postdated cheque is issued today with a date in the future. A drawer does that because he does not want his account to be debited before that date. The paying bank must then waits until the future date to honour the cheque.

However, this practice is unlawful in some countries (France for example). Postdating a check is therefore of no use: the beneficiary can deposit it whenever he wants and the check will be cashed. So it is really up to the payee when the cheque will be paid and not to the bank. And the drawer, in case the fraud is denounced, may have to pay a fine equal to 6% of the amount of the cheque.

Stale Cheque

When a cheque is issued, the payee must encash it before it becomes stale. The validity period of cheques is different : 3 Months in India, 6 months in the USA,  12 months and 8 days in France, 6 years in UK (common banking practice is reject cheques that are over six months old to protect the person who has written the cheque). Stale Cheques are rejected by the bank. However, it does not mean they are invalid. In general, the bank does it to protect the drawer from undue payment. The drawee may then ask the drawer to issue a new cheque and confirm the payment.

Crossed Cheque

Crossing a cheque means making two transverse parallel lines across the cheque on top left hand corner or in top middle. A crossed cheque cannot be encashed at the cash counter of a bank but it can only be credited to the payee’s account with one bank. In other words, Crossing is an instruction by drawer to the payee bank to pay the amount in payee bank account only and not to encash to person who present it over the counter.

Image of a crossed cheque

Example of a crossed cheque

A cheque that is not crossed is called open cheque and is a payable at the counter of the drawee bank on presentation of the cheque.

The various types of bank cheques that we presented provide a good overview of what the cheque is and how it can be used. Do not hesitate to comment if you feel there is a type of cheque that should be part ot this list.

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