Check is a written order directing a bank to pay money to a person or organization, or to the bearer. A check may be written by any person or organization with money in a checking account. The bank transfers the amount specified on the check from the payer’s (check writer’s) account to the payee, the designated person or organization. The word check is spelled cheque in Canada, the United Kingdom, and some other countries.
At one time, checks were widely used because they are safer and more convenient than cash. Checks can be sent safely through the mail because only the payees can legally cash them. Electronic banking made checks less common. Instead of writing a check as payment, many people now use debit cards and the automatic deduction of payments from an account.
How the checking system works.
When a person or organization opens a checking account, the depositor receives a checkbook containing blank checks. The depositor issues a check by writing in the date, the name of the payee, and the amount of money involved. The depositor also signs the check. Every month, the bank sends the depositor a statement. This document lists the deposits made into the account, and the amounts of the checks written against it. The statement also shows the balance, the amount remaining in the account. Most banks enclose the canceled checks for the month. But some banks hold the checks and issue only a statement.
The payee may cash the check—that is, exchange it for cash—or deposit it in a bank account or transfer it to another person or organization. To cash, deposit, or transfer a check, the payee endorses it by signing it on the back. The endorser becomes responsible for the payment of the check if the issuer’s checking account lacks enough money to cover it.
After a bank has received a check in a deposit, the bank collects its money by returning the check to the bank of the check writer. The check writer’s bank then charges the writer’s account for the amount involved. If the two banks are in the same community, the check is routed through a clearinghouse. The clearinghouse collects checks and determines how much money the banks owe each other. Most out-of-town checks are collected by a Federal Reserve Bank or other large bank.
Numbers printed on checks with magnetic ink identify the bank and the owner of the checking account. They make possible the electronic sorting of checks.
Special checking services.
Some payments require the use of a certified check or a cashier’s check. A certified check is an ordinary check made out by a person or organization and then stamped Certified by a bank. The bank sets aside sufficient funds from the check writer’s account to pay for a check that it certifies. A cashier’s check is the bank’s own check, which the bank guarantees. The bank charges its customer’s account for the amount. Cashier’s checks may also be purchased with cash.
Banks and travel agencies sell blank traveler’s checks in denominations of $10, $20, $50, and $100. The person who buys the checks signs them immediately at the bank or agency. He or she signs them again to obtain cash or to make purchases. The second signature verifies the person’s identity. Traveler’s checks can be used throughout the world because the issuing bank or company guarantees payment. The bank or travel agency replaces lost or stolen traveler’s checks.
Checks and the economy.
Checks serve as the chief method of payment in many parts of the world. For this reason, economists consider checkbook money (funds in checking accounts) as part of a nation’s money supply. Such funds make up about 75 percent of the total amount of money in circulation in the United States.
Federal law once prohibited U.S. banks from paying interest on money in checking accounts, unlike funds in savings accounts. In 1980, however, Congress lifted the ban on interest-paying checking accounts. It authorized banks to offer negotiable order of withdrawal accounts, usually called NOW accounts. Like a savings account, a NOW account pays interest. But the depositor can transfer funds to someone else by writing a negotiable order of withdrawal, which is like a check.
For many years, checking accounts were offered only by commercial banks (banks that offer a full range of banking services). Since the 1970’s, however, other institutions have provided accounts that compete with the checking accounts of commercial banks. For example, savings banks and savings and loan associations offer NOW accounts. Banks and other financial institutions also offer special interest-bearing accounts known as money market accounts, from which withdrawals may be made by check. Credit unions use share drafts, which also are similar to checks.
