Are Cheques (/checks) Still Used in Treasury?
Welcome to the fast-paced world of finance, where payment methods have been undergoing significant transformations in recent years. With advancing technology, traditional payment instruments like cheques have faced growing scrutiny. But don’t worry; we’re here to guide you through corporate treasury and shed light on the current state and implications of cheque usage in today’s business landscape.
Cheques have a long and rich history as a means of transferring funds, dating back centuries. However, the rise of digital payment solutions, electronic transfers, and real-time transactions has challenged the relevance of cheques in modern finance. While cheques still have some utility in certain regions and industries, their usage has steadily declined. Pursuing greater efficiency, security, and cost-effectiveness has been the driving force behind this decline.
In this article, we will explore:
- What cheques are
- The different types of cheques available in the market
- How cheques clearing works
- How banks have digitized the cheques processing
- How corporates can use their printers to print cheques
- The shift in favour of electronic formats like E-Cheques
- And much more.
So, let’s embark on a journey through the world of corporate treasury, where the role of cheques is evolving, and new possibilities are emerging to transform how businesses transact and manage their financial affairs. Get ready to explore the exciting changes happening in the world of payments!
Also, Check: What is Cash Pooling & What is Short-Term Financing
What is a Cheque? Understanding the Basics
Our ongoing exploration of payment methods highlights a classic yet sometimes misunderstood form: cheques. But what is a cheque, exactly? Although checks may seem old-fashioned, they are relevant in certain scenarios, especially for corporate treasurers. So, let’s begin with understanding, “What is a cheque?”
A cheque is often referred to as a paper-based instrument in treasury. Think of it as a written document instructing a bank to pay a specific amount from one person’s (or entity’s) account to another. The cheque issuer, or the payor, signs and dates the cheque, giving the bank an order to transfer funds to the beneficiary, referred to as the payee in the cheque world.
It’s worth noting that some countries have phased out cheques, but in others, they’re still very much in play, especially in corporate settings. Even as digital banking grows, traditional business accounts may still offer chequebooks as an option.
Beneficiary, Payee, Payor, and Drawer: Who’s Who in the Cheque World
We need to understand a few more terms to clarify the terminology associated with cheques. The ‘payee’ or ‘beneficiary’ is the individual or entity receiving the money. The ‘payor’ or ‘drawer’ is the person writing the cheque, and they are responsible for the payment.
An essential term related to cheques is the ‘drawee.’ The drawee is the bank where the payor holds their account, and it’s from this account that the cheque amount gets deducted. The bank then credits the same amount to the payee’s account. This transfer could occur in two primary ways – either the payee deposits the cheque into their account and waits for it to clear, or they may cash the cheque, obtaining physical cash (banknotes) in return.
Remember, the act of cashing a cheque means you’re converting it into cash without depositing it into your bank account. The cheque gets marked as ‘cashed,’ and the bank gives you the cash equivalent of the cheque’s value.
In our ongoing exploration of the payment landscape, the concept of cheques allows us to delve deeper into some specific, still-relevant topics. Despite being seen as a “boomer technology,” understanding cheques and their mechanics provides valuable insights into traditional corporate treasury practices.
The Intricacies of Cheque Transactions: What Happens When Funds are Insufficient?
A fascinating aspect of cheques is how they’re handled when insufficient funds are in the payor’s account. You may have seen scenarios in movies or TV shows where someone fraudulently issues a cheque, banking on the fact that it’s not immediately checked against the funds in the account. This situation raises the question, “What happens if the person issuing the cheque doesn’t have enough money in their bank account?”
Different Types of Cheques and the Issue of Bounced Cheques
To begin, it’s essential to know that there are different types of cheques. In the movie “Catch Me If You Can,” the main character issues cashier’s cheques, considered ‘official’ cheques from a bank. The authenticity of such cheques is usually not questioned, and they can be cashed out directly without checking the available balance in the drawer’s account. This is a different scenario from what we typically encounter with regular cheques.
A primary concern with cheques is the uncertainty of whether the payor has the required funds in their account. If the payor doesn’t have the necessary amount, we encounter a situation known as a ‘bounced cheque.’ The term ‘bounced’ is used because the cheque, once deposited at the payee’s bank, is returned or ‘bounced back’ due to lack of funds.
Unfortunately, this situation often results in fees levied by the bank. Typically, the payor (the person who wrote the cheque) will have to pay a fee for issuing a cheque without sufficient funds. The payee (the person who deposited the cheque) might also be charged a fee depending on the circumstances. However, it’s more common for the fee to be debited from the payor’s account.
How to Prevent a Cheque from Bouncing
We’ve just learned about the potential issue of cheques bouncing due to insufficient funds. Now let’s discuss how to prevent that and why using cheques might be advantageous over carrying large amounts of cash.
If you’re the one issuing the cheque (the payor), the simplest way to prevent a cheque from bouncing is to ensure you have sufficient funds in your account before writing the cheque. Seems pretty straightforward, right? But what about if you receive the cheque (the payee)?
As a payee, your best bet is to ask for a certified cheque. This is a special type of cheque where the bank of the payor guarantees there are enough funds in the account to cover the cheque. In some places, the money required to cover the cheque is set aside in a different account or marked with a specific reference to prevent the payor from using it for other purposes. This ensures the payee gets paid.
For example, certified cheques are commonly used in France for big transactions between individuals. This way, both parties can be confident that the transaction will go smoothly.
Pros and Cons of Using Cheques: Why Choose Cheques?
Let’s take a moment to delve into why someone might prefer cheques over other payment methods and the drawbacks of their use. Remember, every payment method has its strengths and weaknesses. It’s about finding the right fit for you.
Pros of Using Cheques
When comparing cheques to cash, one significant advantage that comes to light is safety. Cheques provide a more secure way of moving large sums of money. They’re less bulky, and if you lose your cheque or get mugged, the damage is significantly less than if you were carrying the same amount in cash.
Why is that? Because cheques have built-in security features. The payee’s name must be written on the cheque, and the payor must sign it. So even if someone else gets hold of the cheque, they can’t do anything with it. Only the person whose name is on the cheque can cash it.
Also, in addition to the written name, banks verify signatures, adding another layer of security.
Therefore, while cheques come with challenges (like potential bouncing), they also offer unique advantages, particularly when dealing with large transactions. It’s crucial to weigh these pros and cons to choose the best payment method for your specific needs.
Let’s look at another advantage you might not have considered – mailing. Despite it sounding old-fashioned to some, sending a cheque via mail is relatively safe and can be a convenient option for certain people.
However, the convenience of cheques is a matter of perspective. Some people find it easy to write a cheque, pop it in an envelope and mail it, compared to handling large amounts of physical cash.
Cons of Using Cheques
On the flip side, there are a few drawbacks to using cheques that we need to consider.
The biggest disadvantage is the time it takes to process a cheque. It could be quite a while From when you receive a cheque to when the money lands in your bank account. This is due to the time it takes to take the cheque to your bank and its processing time. And all this time, you’re left hoping the cheque doesn’t bounce!
Another downside is that cheques are paper-based. In an increasingly digital world, many payment methods are entirely electronic and can process payments in real time. Compared to these options, cheques can seem a bit slow and outdated.
And if you’re a business, there’s another con to consider: fees. Typically, banks charge businesses a fee to collect cheques. While individuals usually don’t face this issue, corporations need to factor in it.
Yet despite these drawbacks, cheques are still widely used in some parts of the world, like the United States and France. Some businesses also prefer this payment method. It’s important to remember that the best choice depends on your specific situation and needs.
Understanding Different Types of Cheques
While the ‘normal’ and ‘certified’ cheques might be familiar to many of us, did you know that there are other cheques, each with unique characteristics and uses? Guillaume provides a wealth of information on this topic.
Variations of Cheques
Cheques can come in many shapes and sizes, especially in different countries and their specific requirements. For example, in some places, you might still need to pay your taxes with a cheque.
Here are a few common types of cheques you might come across:
- Cashier’s cheque: If you’ve ever seen the movie “Catch Me If You Can,” you’ll already know about this one! A cashier’s cheque is guaranteed by the payer’s bank and signed by a bank employee. This means the bank takes responsibility for the funds. These cheques are often used for large transactions because of this security.
- Bearer’s cheque: Here’s another term that might sound old-fashioned, but it’s still relevant today. A bearer’s cheque doesn’t need to have the payee’s name written on it. Anyone with the cheque can take it to a bank and cash it. This feature removes some of the security of regular cheques, where only the person named on them can cash them.
- Post-dated cheque: This cheque has a specific cash-in date written on it. The payee can’t access the money until that date, even if they take the cheque to the bank before then. This type of cheque is especially common in certain countries in Latin America.
Pros and Cons of Each Cheque Type
Like anything else, each type of cheque has its pros and cons.
- The regular cheque is straightforward to use.
- While a bit more cumbersome because it needs a separate bank account and a specific reference code, the certified cheque is probably the safest, particularly regarding bouncing checks.
- The cashier’s cheque offers an added guarantee level because it’s linked directly to a bank.
- The bearer’s cheque provides the most versatility but offers less security because anyone who holds it can cash it.
- Lastly, the post-dated cheque offers a way to schedule payments for a future date.
So, when deciding which cheque type to use, consider these points. The right choice for you will depend on your specific situation and needs.
Turning a Promise into Payment: The Role of Cheque Clearing
Cheque clearing is an integral part of treasury operations, transforming a pledge of payment into an actual transfer of funds. This critical banking process involves a series of steps, as explained by Guillaume in the podcast.
Understanding Cheque Clearing
Clearing encompasses the activities from when a financial commitment is made until the money lands in the beneficiary’s account. This process applies to various financial transactions, including cheques, electronic payments, foreign exchange deals, and trade transactions.
The Verification Process in Cheque Clearing
A significant part of cheque clearing involves verification. When a bank receives a cheque, it checks to see if the payer’s account has sufficient funds to cover the cheque amount. Guillaume presents an example: if he goes to his bank with a $100 cheque written by Hussam, the bank needs to confirm if Hussam has enough money in his account to pay the $100.
The Role of Clearing Houses in Cheque Clearing
The payee’s bank (the bank receiving the money) sends the cheque to the payer’s bank to verify the funds. However, banks don’t communicate directly with each other, especially when hundreds of banks are involved. Instead, they use third parties known as clearing houses.
For example, in the United States, banks send a scanned copy of the cheque to the Federal Reserve Banks (the Fed), who then forward it to the payer’s bank for checking. It simplifies the process as every bank needs to connect with the Fed, not all other banks. This central entity, known as a “hub,” significantly reduces the number of necessary connections.
Timeframe for Cheque Clearing
The cheque-clearing timeframe varies, typically taking two to five business days. The duration depends on the country, bank size, and additional checks needed. However, for transactions within the same bank (internal account transfers), the process is faster and often completed within one business day.
Digital Transformation of Cheque Clearing
Historically, banks sent physical cheques to each other. However, around the 1980s, they adopted a system to scan cheques and send electronic versions to the payer’s bank, a process known as “cheque truncation.” Despite this digitization, the process still takes time due to the verifications and scanning tasks involved.
International Aspects of Cheque Clearing
In different countries, similar systems apply with a third party involved. For example, this third party in the UK is the Cheque and Credit Clearing Company. Swift, a communication method among banks, primarily facilitates international transactions, while domestic transactions involve clearing houses like the Fed in the US or the Cheque and Credit Clearing Company in the UK.
In conclusion, cheque clearing is a complex but essential banking process, ensuring that a promise of payment translates into actual money transfers from the payer’s account to the payee’s.
The Role and Use of Cheques in Corporate Treasury
In the corporate treasury, cheques play an interesting but often diminishing role. Our experts, Guillaume and Hussam, discuss why businesses might still use cheques and the advantages and disadvantages of doing so.
Declining Use of Cheques in Corporations
In an era where technology is dominant, treasurer and finance departments are moving away from traditional payment methods like cheques. There are several reasons behind this shift:
- Preference for Electronic Transactions: Companies prefer electronic formats and real-time or near real-time transactions. These offer greater visibility and speed. The faster the transaction, the longer the money can be used for other purposes.
- Planning for Delivery of Money: Companies must plan for five days for the funds to be delivered if a cheque is used. This is the time during which the money cannot be invested overnight.
- Safety Concerns: Cheques do not fare well in terms of safety, given the opportunities for fraud.
According to Guillaume, it is increasingly rare to see advanced treasury departments using cheques for company suppliers or payroll payments. The exceptions are typically for specific purposes like certain taxes payable only by cheque in certain countries, significant transactions with specific counterparties, or donations to small associations that may not be able to accept other forms of payment.
Delays in Cheque Processing: A Benefit?
There’s a flip side to the delay in processing cheques. If a company wishes to delay the exit of funds from their account, they might use a cheque. This can buy them five business days before the money leaves their account.
However, there’s a catch, as Guillaume points out. There’s still uncertainty about the exact time for the cheque to clear, anywhere between two to five days. And this uncertainty might not always work in favour of the company.
Moreover, in the context of large transactions and partnerships, trust and transparency are crucial. Businesses would not want to appear unreliable or dishonest in their payment delays. Establishing and maintaining a trustful relationship with suppliers and partners is often more important than the short-term gain from a delay in payment.
In conclusion, while cheques are still used in the corporate treasury, the trend is towards electronic and faster transactions. Cheques, given their delay in processing and safety concerns, are typically not the first choice for treasury professionals. However, they may still find a place in specific situations or transactions.
Corporate Practice of Printing Cheques In-house
Hussam and Guillaume delve into an interesting practice some companies adopt – printing their cheques. Though uncommon, this procedure is still operational in certain industries and regions. Let’s explore the reasons why companies might opt for this method and the potential benefits it offers.
Process of Printing Cheques In-house
In a typical setting, when we think about cheques, we envision a chequebook that we, as individuals, can write on. However, some corporations choose to print their cheques.
This procedure involves having a secure, dedicated cheque printer within the company. With this printer, businesses can generate the payment cheques they need to dispatch to their payees.
When the procedure is refined, it can even include integration with an Enterprise Resource Planning (ERP) system. This system then sends the payment details directly to the printer, automating the cheque printing process. Even so, there’s still a manual part involved, as the physical cheque must be sent or handed over to a bank branch or the intended recipient.
Benefits of In-house Cheque Printing
Now, you might be wondering – why companies would go through the trouble of printing cheques in-house. There are several reasons:
- No Need for Traditional Chequebooks: With a dedicated printer, businesses can print cheques, eliminating the need for traditional chequebooks.
- Supplier Payment Terms: If a supplier only accepts cheques or the only alternative is cash, a company might opt for printing its cheques for safety reasons. This gives them control over issuing a paper-based instrument, fulfilling their obligation to the supplier.
- Post-Dated Cheques: Another scenario where printing cheques might be useful is for post-dated cheques. A company can issue a cheque specifying that it can only be deposited after a certain date. The payee receives the cheque but can’t cash it until the stated date.
Despite these advantages, Guillaume stresses that if available, electronic formats are the preferred choice. However, printing cheques in-house can be a suitable alternative in economies or industries where electronic channels are not as advanced. This practice underscores the need for flexibility in payment methods, allowing companies to adapt to various situations and requirements.
The Role of Banks in Corporate Cheque Printing and the Emergence of E-cheques
In the world of cheque processing, companies have various options. One such choice involves banks printing cheques on behalf of corporations. Additionally, the concept of e-cheques is becoming increasingly prevalent. This discussion between Hussam and Guillaume provides a clear understanding of these topics.
Bank-Assisted Cheque Printing: An Option?
Companies often weigh the pros and cons of different cheque processing methods. Here, Guillaume illuminates the possibility of banks offering cheque printing services for corporations, as Hussam wonders about it. This could potentially save businesses from the investment in their cheque printing systems. However, Guillaume highlights the caveat that not all banks might support this distinct need.
E-cheques: The Digital Shift
Despite banks possibly providing cheque printing services, the process usually morphs into something different – issuing e-cheques. E-cheques are digital versions of their paper counterparts, and this shift towards digitization simplifies the process greatly. According to Guillaume, when a company requests a cheque, the bank, instead of printing a physical cheque, creates a scanned, electronic version. This digital document is then exchanged between banks, forming the essence of an e-cheque.
The Blurred Line: E-cheques vs Wire Transfers
As this conversation delves into the realm of e-cheques, the line between these and wire transfers seems to blur. Hussam’s query about the difference between an e-cheque and a wire transfer underlines this ambiguity. Guillaume agrees with the blurred distinction, stating that, unlike paper cheques, the line separating e-cheques and wire transfers is less definitive.
According to Guillaume, the primary distinction lies in the networks they utilize. Despite their digital nature, E-cheques still use the Automated Clearing House (ACH) network, differentiating them from wire transfers. However, he suggests a more detailed exploration of these distinctions in a future discussion.
Overall, as Guillaume shares, the landscape of cheque processing is evolving with innovations such as bank-assisted cheque printing and e-cheques. With these changes, the differences between new and traditional digital methods are becoming less discernible. This underlines the need for treasury professionals to gain a deeper understanding of these payment tools for efficient navigation in their field.
Challenges of Receiving Payments Through Cheques for Corporate Treasurers
Making and receiving payments can greatly influence a company’s financial operations. This conversation between Hussam and Guillaume explores the distinct challenges corporate treasurers face when receiving cheques, making us understand its various implications.
Receiving Cheques: A Complicated Affair
While the transition from issuing cheques may be straightforward for a corporate treasurer, the situation gets a little complex regarding receiving payment through cheques. Guillaume notes that treasury departments may find enforcing a no-cheque policy regarding incoming payments more difficult.
Why is this the case? Well, some clients may prefer, or even only be able, to make payments via cheque. While a company can enforce its policies internally, rejecting a form of payment from customers is not as easy. After all, you want to keep your customers happy and their money flowing into your business.
Market Practices and Consumer Preferences
Guillaume further explains that accepting cheques can be tied to market practices in certain countries. A company operating in such a place must adapt its payment processing to accommodate this preference. If a business serves individuals directly, like a retail store, it might have to be ready to accept multiple forms of payment, including cheques.
This situation is somewhat similar to cash payments, as discussed in previous episodes. Like cash, cheques can be a preferred mode of payment for many individuals. If your business is a supermarket, a clothes shop, or something similar, you might need to accept cheque payments simply because some people prefer this method.
The Implications for Corporate Treasury
From a corporate treasury perspective, dealing with customer cheque payments can be quite a task. This method involves more manual processing and is more prone to errors. It can also slow down the overall cash flow into the business. But, as Guillaume highlights, sometimes it’s just part of the job. Balancing customer preferences with efficient financial processes can be a challenging but necessary aspect of a corporate treasurer’s role.
The Impact of Handling Cheques on Corporate Treasurers
Understanding the complexities of cheque handling can be quite important for corporate treasurers. Hussam and Guillaume dive into the specifics of this process, discussing its impact on treasury operations and the potential advantages it may hold over cash transactions.
Late Payments and Logistical Challenges
As Hussam rightly points out, payments may take longer to process when dealing with cheques, a potential headache for corporate treasurers. Cheques require depositing at a bank, adding an extra layer of administration, similar to handling cash, but with fewer physical items to manage.
Guillaume reinforces this, stating that if you have numerous locations collecting cheques, each one needs a nearby bank branch to deposit them. This necessarily implies that your banking partner should support a broad branch network. In addition, you’ll need a secure process to transport cheques from your locations to the bank. This could involve employees or a specialized third-party transporter.
Additionally, there’s the task of reconciling the collected cheques, adding more administrative work. Guillaume sees these as significant challenges for seemingly little benefits, but sometimes you might not have a choice.
The Comparison: Cheques vs. Cash
Interestingly, Hussam suggests that cheques could be a preferable payment method to cash despite the challenges. The transport fees could be lower, and the processing time may not be significantly different, albeit a bit longer.
But what about bounced cheques? Hussam acknowledges this concern, suggesting that a business might still prefer this over cash transactions, even with the risk of cheques bouncing.
Guillaume elaborates on this point, mentioning that many retailers now have verification processes to mitigate the risk of bounced cheques, often requesting IDs that they can scan and keep a record of for potential future retrieval.
The Lesser of Two Evils?
Despite the challenges of cash and cheques, Guillaume seems to suggest that cheques might be the lesser of two evils for a retail company. But he does caveat this by saying it’s akin to choosing between one sickness and another.
Ideally, customers would pay by card, or even better, through digital payments or e-wallets, but as we’ll see in a future episode, these also have their costs and implications. Guillaume emphasizes that although these methods may not be the best for larger corporations, they sometimes have to adapt to market practices.
Where are Cheques Still Widely Used?
Certain countries stand out when it comes to the global use of cheques. Guillaume notes that the United States and Canada are prominent examples of cheques being popular. This is largely due to established market practices, meaning it’s simply how people have become accustomed to handling their transactions.
France also joins this group with a notable usage of cheques. Interestingly, as Guillaume highlights, this is not just among individual consumers but also in business-to-business (B2B) transactions. Other cheque-friendly nations include Cyprus, Portugal, Singapore, and the UK.
However, this doesn’t mean that cheques are preferred everywhere. Guillaume further points out the gradual decline in cheque usage in these developed economies.
Cheque Use in Developing Economies
Turning our attention to the developing world, Guillaume brings to light the reality of these regions. Cheques find their relevance in Latin America and Africa, where electronic channels are yet to mature fully.
Businesses in these areas often opt for cheques when given a choice between cash and cheques. Why, you may ask? The answer, as Guillaume explains, is simple: safety.
Special Cheques: An Interesting Practice
Speaking of cheques, did you know there are special kinds? Hussam and Guillaume dive into this, discussing cheques associated with verified accounts. Particularly in Latin America, these and post-dated cheques are quite common.
Guillaume provides a fascinating insight into this practice, noting how these post-dated cheques can serve as an advance on the payment. This can be a reassuring gesture for the payee, even when the cash isn’t immediately available.
The Digital Shift in Payments
Despite the current usage, there’s a noticeable shift away from physical cheques, and Guillaume doesn’t miss this trend. Given the reduction in physical shopping, he cites the Covid-19 pandemic as an accelerator in this transition.
However, it’s not all about waving goodbye to cheques. Guillaume brings our attention to a growing trend: e-cheques. This digital version of the cheque offers a happy medium between traditional cheque payments and the global shift towards digital financial transactions. The future of cheques may be more digital than we might think!
Conclusion:
So, we have explored the world of cheques in corporate treasury. While cheques have a long-standing history as a payment instrument, their usage is gradually declining in many developed economies. Treasury professionals and finance departments strive to embrace electronic formats, driven by the desire for efficiency, safety, and real-time transactions.
Throughout our discussion, we learned that cheques are relevant in certain regions and industries. Countries like the United States, Canada, France, Cyprus, Portugal, Singapore, and the UK continue to rely on cheques to some extent. In developing economies, where electronic channels are less advanced, they offer a safer alternative to cash.
However, as technology advances and digital payment methods gain prominence, the shift from physical cheques becomes apparent. The Covid-19 pandemic has further accelerated this transition, pushing businesses and consumers toward more convenient and contactless payment options.
Nevertheless, cheques have not completely vanished from the financial landscape. Special cheques, such as those associated with verified accounts and post-dated cheques, retain their relevance in specific contexts. These practices allow payees to leverage them as an advance on payment or to ensure payment security.
