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A traveller's cheque is a
medium of exchange
In economics, a medium of exchange is any item that is widely acceptable in exchange for goods and services. In modern economies, the most commonly used medium of exchange is currency.
The origin of "mediums of exchange" in human societies is ass ...
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
cheque
A cheque, or check (American English; see spelling differences) is a document that orders a bank (or credit union) to pay a specific amount of money from a person's account to the person in whose name the cheque has been issued. The pers ...
s 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.
They were 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 or 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
In finance, an exchange rate is the rate at which one currency will be exchanged for another currency. Currencies are most commonly national currencies, but may be sub-national as in the case of Hong Kong or supra-national as in the case of ...
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 transaction 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
Foreign exchange risk (also known as FX risk, exchange rate risk or currency risk) is a financial risk that exists when a financial transaction is denominated in a currency other than the domestic currency of the company. The exchange risk arise ...
, and normally pays a fee to
hedge
A hedge or hedgerow is a line of closely spaced shrubs and sometimes trees, planted and trained to form a barrier or to mark the boundary of an area, such as between neighbouring properties. Hedges that are used to separate a road from adjoin ...
against the risk.
Their use has been in decline since the 1990s, when a variety of more convenient alternatives, such as
credit card
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 accrued debt (i.e., promise to the card issuer to pay them for the amounts plus the o ...
s,
debit card
A debit card, also known as a check card or bank card is a payment card that can be used in place of cash to make purchases. The term '' plastic card'' includes the above and as an identity document. These are similar to a credit card, but u ...
s,
pre-paid currency cards
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 accrued debt (i.e., promise to the card issuer to pay them for the amounts plus the o ...
, and
automated teller machine
An automated teller machine (ATM) or cash machine (in British English) is an electronic telecommunications device that enables customers of financial institutions to perform financial transactions, such as cash withdrawals, deposits, fun ...
s, became more widely available and easier for travellers to use. Also, as interest rates sharply declined in many developed countries in the late 20th and early 21st centuries, travellers's cheques became much less profitable to issue and thus many issuers scaled back advertising and promoting their use while others stopped selling them altogether. 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
In jurisprudence, a natural person (also physical person in some Commonwealth countries, or natural entity) is a person (in legal meaning, i.e., one who has its own legal personality) that is an individual human being, distinguished from the bro ...
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, and in 1874,
Thomas Cook
Thomas Cook (22 November 1808 – 18 July 1892) was an English businessman. He is best known for founding the travel agency Thomas Cook & Son. He was also one of the initial developers of the "package tour" including travel, accommodatio ...
was issuing "
circular notes" that operated in the manner of traveller's cheques.
American Express
American Express Company (Amex) is an American multinational corporation specialized in payment card services headquartered at 200 Vesey Street in the Battery Park City neighborhood of Lower Manhattan in New York City. The company was found ...
developed a large-scale international traveller's cheque system in 1891, to supersede the traditional
letters of credit
A letter of credit (LC), also known as a documentary credit or bankers commercial credit, or letter of undertaking (LoU), is a payment mechanism used in international trade to provide an economic guarantee from a creditworthy bank to an exp ...
.
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
Marcellus Flemming Berry was an American inventor who devised the traveller's cheque
A traveller's cheque 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 currenc ...
, after company president
J. C. Fargo
James Congdell Strong Fargo (May 5, 1829 – February 8, 1915) was a president of the American Express Company for 30 years, and the brother of American Express Company and Wells Fargo co-founder, William Fargo.
Early life
Fargo was born on Ma ...
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 traveller's cheques have been marketed; the most familiar of those were
Thomas Cook Group
Thomas Cook Group plc was a global travel group, headquartered in the United Kingdom and listed on the London Stock Exchange from its formation on 19 June 2007 by the merger of Thomas Cook AG — successor to Thomas Cook & Son — an ...
,
Bank of America
The Bank of America Corporation (often abbreviated BofA or BoA) is an American multinational investment bank and financial services holding company headquartered at the Bank of America Corporate Center in Charlotte, North Carolina. The bank w ...
and American Express.
Declining use
The convenience and wider acceptance of such alternatives as
credit
Credit (from Latin verb ''credit'', meaning "one believes") is the trust which allows one party to provide money or resources to another party wherein the second party does not reimburse the first party immediately (thereby generating a debt) ...
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.
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.
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.
Denomination and change
Traveller's cheques are available in several currencies such as
US dollars
The United States dollar (Currency symbol, symbol: Dollar sign, $; ISO 4217, code: USD; also abbreviated US$ or U.S. Dollar, to distinguish it from Dollar, other dollar-denominated currencies; referred to as the dollar, U.S. dollar, American ...
,
Canadian dollar
The Canadian dollar ( symbol: $; code: CAD; french: dollar canadien) is the currency of Canada. It is abbreviated with the dollar sign $, there is no standard disambiguating form, but the abbreviation Can$ is often suggested by notable style ...
s,
pounds sterling
Sterling (abbreviation: stg; Other spelling styles, such as STG and Stg, are also seen. ISO 4217, ISO code: GBP) is the currency of the United Kingdom and nine of #Crown Dependencies and British Overseas Territories, its associated territori ...
,
Japanese yen
The is the official currency of Japan. It is the third-most traded currency in the foreign exchange market, after the United States dollar (US$) and the euro. It is also widely used as a third reserve currency after the US dollar and the ...
,
Chinese yuan
The renminbi (; symbol: ¥; ISO code: CNY; abbreviation: RMB) is the official currency of the People's Republic of China and one of the world's most traded currencies, ranking as the fifth most traded currency in the world as of April 202 ...
and
euro
The euro ( symbol: €; code: EUR) is the official currency of 19 out of the member states of the European Union (EU). This group of states is known as the eurozone or, officially, the euro area, and includes about 340 million citizens . ...
s; denominations usually being 20, 50, or 100 (× 100 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
The United States of America (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country primarily located in North America. It consists of 50 states, a federal district, five major unincorporated territorie ...
, if the payee is equipped to process cheques electronically at point of sale (''see:''
Check 21 Act
The Check Clearing for the 21st Century Act (or Check 21 Act) is a United States federal law, , that was enacted on October 28, 2003 by the 108th U.S. Congress. The Check 21 Act took effect one year later on October 28, 2004. The law allows the ...
), 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, the fraudster gets back the value of the traveller's cheque and also makes 50% of the value as profit.
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 A check verification service provides businesses or individuals with either the ability to check the validity of the actual check or draft being presented, or the ability to verify the history of the account holder, or both.
There are a number of d ...
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.
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 Travelers Cheque Card'', a
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 ...
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
Visa most commonly refers to:
*Visa Inc., a US multinational financial and payment cards company
** Visa Debit card issued by the above company
** Visa Electron, a debit card
** Visa Plus, an interbank network
*Travel visa, a document that allows ...
TravelMoney card.
See also
*
Cashier's check
A cashier's check (or cashier's cheque, cashier's order) is a check guaranteed by a bank, drawn on the bank's own funds and signed by a cashier. Cashier's checks are treated as guaranteed funds because the bank, rather than the purchaser, is resp ...
*
Certified check
A certified check (or certified cheque) is a form of check for which the bank verifies that sufficient funds exist in the account to cover the check, and so certifies, at the time the check is written. Those funds are then set aside in the bank's ...
*
Eurocheque
The Eurocheque was a type of cheque used in Europe that was accepted across national borders and which could be written in a variety of currencies.
Eurocheques were originally introduced in 1969 as an alternative to the traveler's cheque and for i ...
*
Money order
A money order is a directive to pay a pre-specified amount of money from prepaid funds, making it a more trusted method of payment than a cheque.
History
The money order system was established by a private firm in Great Britain in 1792 and was ...
References
{{Authority control
Cheques
Travel gear
1770s introductions
British inventions