The Cheque is More than a Payments Instrument

Stanley Epstein, Principal Associate, Citadel Advantage

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.