A traveller's cheque[a] 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 currencies and are preprinted, fixed-amount cheques 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 holiday 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 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, and normally pays a fee to hedge against the risk.
Their use has been in decline since the 1990s, when a variety of more convenient alternatives, such as credit cards, debit cards, money transfer services, pre-paid currency cards, and automated teller machines that accept foreign cards, 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, traveller'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 organisation 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 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
Coutts & Co. traveller's cheque, for 2 pounds. Issued in London, 1970s. Langmead Collection. On display at the British Museum in London
Traveller's cheques were first issued on 1 January 1772 by the London Credit Exchange Company for use in 90 European cities,[1] and in 1874, Thomas Cook was issuing "circular notes" that operated in the manner of traveller's cheques.[2]
American Express developed a large-scale international traveller's cheque system in 1891, to supersede the traditional letters of credit.[3] 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, after company president J. C. Fargo 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 holiday for use in foreign countries without the risks associated with carrying large amounts of cash. They also had the advantage of being available in smaller denominations for travelers of more modest means, in an era when the well off tended to carry letters of credit.
Several brands of traveller's cheques have been marketed; the most familiar of those were Thomas Cook Group, Bank of America and American Express.
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.[4]
Denomination and change
Traveller's cheques are available in several currencies such as US dollars, Canadian dollars, pounds sterling, Japanese yen, Chinese yuan and euros; 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, if the payee is equipped to process cheques electronically at point of sale (see:Check 21 Act), 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
A number of American Express cheques bought at the same time at a bank in 2012, which show one of the safety features - the consecutive serial numbers. The buyer gets a printed list with the numbers, and when cashing one or more, they mark those on the list. When the rest is lost or stolen, the list serves as proof of the fact which cheques were already cashed.
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.[5]
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.[6]
Alternatives
In 2005, American Express released the American Express Travelers Cheque Card, a stored-value card 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 TravelMoney card.[7]
