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The Cheque is More than a Payments Instrument

So the venerable old cheque has been singled out and "tapped" for termination - in the UK at least. Of course, in the new world of electronic payments and instantaneous communications, the demise of the cheque was inevitable. A payment instrument devised in a simpler time, the cheque representing a negotiable claim on the bank account of the drawer, was a major innovation in its day. It represented a new way to make payments in a manner that avoided the actual transfer of cash or bullion. The humble cheque as a payment instrument spawned other major innovations such as the clearing and settlement processes that are major features of all electronic payment, clearing and settlement systems to this very day.

As a payment and a financial instrument, the cheque reigned supreme for over two centuries and spread across the face of the globe. But, as with all empires, the cheque's star must eventually set. The cheque has become an anachronism in today's high-tech, high-speed world. It is an expensive system to operate and worst of all its "flow" is all the wrong way.

In a technology driven, high-speed, risk averse world the way in which the cheque operates is a barrier to the smooth high-speed payments processing operation that puts all the right checks and balances in the right places and in the right sequence.

All other payment types flow from the payer to the payee (now that is a simple word for the receiver that today seems to have gone out of fashion). The opposing flow of the cheque from the recipient (payee) to the payer's bank is just a hindrance to modern processing practices as well as a huge source of risk.   

Of course the cheque is more than a payment instrument, though many people do not know this. The cheque served (and still does in many places) a multiplicity of financial roles, vital in day-to-day business activities. Just consider four of these.

  1. A means of commercial and consumer credit,
  2. An access point to commercial bank lending,
  3. A medium of exchange, and
  4. A payment instrument.

In many countries, even today, the cheque still serves as a credit and loan instrument. Post dated cheques give buyers credit extended by a merchant or store, while the self-same cheques with their legal basis and their negotiability give that same merchant immediate access to discount facilities (i.e. the cash) at commercial banks. 

During the six and a half month bankers strike in Ireland in 1970 the humble cheque served as a medium of exchange too, with very little default once the banks got back to operating again.

Until recently in most countries the only "payment" law in existence was that relating to the cheque. Cheque laws and banking laws run hand-in-glove. The legal corpus surrounding other types of payment instruments is, with a few exceptions, sketchy and in some cases nonexistent. Within the realms of the law the cheque or "Bill of Exchange", which it really is, still has a lot of life left in it. Most countries created significant laws and legal principles based on the cheque/ bill of exchange.

The bill of exchange still remains the basic instrument of international trade and finance. While the UK may well abolish the use of the cheque for day-to-day payments purposes it is unlikely that the instrument will suffer an ignominious end. Trade practices and international conventions will ensure that the cheque/ bill of exchange will still be with us for a long time to come.

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Comments: (4)

Dave Kershaw
Dave Kershaw - Ulster Bank - Belfast 25 November, 2009, 10:47Be the first to give this comment the thumbs up 0 likes

My guess is that it'll be replaced by the one-off direct debit mandate (SEPA style).

A Finextra member
A Finextra member 30 November, 2009, 14:45Be the first to give this comment the thumbs up 0 likes

Here in France, cheques are still very much in use despite the FACT that France is the leading chip and pin country. 

For example, in France, a cheque is given to a property owner as a form of deposit when renting an apartment. The property owner rarely deposits the cheque but at least has that option of depositing it against any eventual damage to the property. 

I would then add :

5. a form of collateral to Stanley's list above.

Cedric Pariente
Cedric Pariente - EFFI Consultants - Paris 30 November, 2009, 16:00Be the first to give this comment the thumbs up 0 likes

Hi Stanley,

First, thank you for your blog. It's always a pleasure to read you.

 

Now concerning Cheques, I doubt that they can be abolished this easily.

We still use them widely in France.

I'm gonna certainly write a blog about it to give you a proper answer and raise a voice for the "NO" to the abolition.

Feel free to read and comment this blog to come. I would really appreciate to have your point of view.

Rajeev Nair
Rajeev Nair - Accenture - Bangalore 01 December, 2009, 10:22Be the first to give this comment the thumbs up 0 likes

Good analysis to differentiate the loss of functionality with cheque termination (not truncation).

Now, mandates as specified in SEPA Direct Debits, will be one way to look at replacement of a cheque in case of recurring payments or as a collateral or as means of commercial credits. Already ACH stop payments are in place similar to cheque stop payments. The issue then is the legality of mandates and the recourse to creditor to claim against debtor if a collection based on mandate fails. I think, the way then is through mandates only with more legal thought process to meet market requirements which otherwise was met through cheques.