A traveler's cheque 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 vacation in foreign countries instead of cash, as many businesses used to accept traveler's cheques as currency. The incentive for merchants and other parties to accept them lay 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 traveler's cheque can never 'bounce' unless the issuer goes bankrupt and out of business. If a traveler's cheque were lost or stolen, it can be replaced by the issuing financial institution.
The financial institutions issuing traveler's cheques earn income in a number of ways. Firstly, they would 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 traveler'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 statement date). On the other hand, the set up cost and the cost of issuing and processing traveler's cheques is much higher than for credit card transactions. The cheque issuer carries the exchange rate risk, and would normally pay 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, pre-paid currency cards and automated teller machines, became more widely available and were easier for travelers to use. Traveler's cheques are no longer widely accepted and cannot easily be cashed, even at the banks that issued them. The alternatives to traveler's cheques were generally cheaper and more flexible. Travel money cards offer similar features to traveler's cheques, including prepurchase of foreign currency at rates applicable at date of purchase, but offer greater ease and flexibility, such as use like a regular credit card, no need to get change in a local currency, besides other features.
Legally, the parties to traveler's cheque transactions are as follows. The organization that produces a traveler'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.
Traveler's cheques were first issued on 1 January 1772 by the London Credit Exchange Company for use in 90 European cities, and in 1874, Thomas Cook was issuing 'circular notes' that operated in the manner of traveler's cheques.
American Express developed a large-scale international traveler's cheque system in 1891, to supersede the traditional letters of credit. It is still the largest issuer of traveler's cheques today by volume. American Express's introduction of traveler'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 1950s and the 1990s, traveler's cheques became one of the main ways that people took money on vacation for use in foreign countries without the risks associated with carrying large amounts of cash.
The convenience and wider acceptance of such alternatives as credit and debit cards and the wider availability of ATMs has led to a significant decline in the use of traveler's cheques since the 1990s. In addition, security concerns of retailers has led to many businesses ceasing to accept them, in turn making them less attractive to travelers. This has led to complaints about the difficulty that holders have in using them. In much of Europe and Asia, traveler's cheques are no longer widely accepted and cannot be easily cashed, even at the banks that issued them.
Since traveler's cheques do not earn interest, one of the main incentives financial institutions have to sell traveler's cheques is that they effectively represent an interest-free loan from the purchaser to the seller. The sustained decline in interest rates in most of the developed world since the early-to-mid 1990s has substantially reduced the profitability of traveler's cheques for their issuers. Financial institutions have responded to this development by charging new fees for traveler's cheques, increasing existing fees, or by exiting the business altogether.
Purchasing cheques for later use
Traveler's cheques are sold by banks and agencies to customers for use at a later time. Upon obtaining custody of a purchased supply of traveler's cheques, the purchaser would immediately sign each cheque. The purchaser will also receive a receipt and some other documentation that should be kept in a safe place other than where they carry the cheques. Traveler'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.
To cash a traveler's cheque to make a purchase, the purchaser would, in the presence of the payee, date and countersign the cheque in the indicated space.
Denomination and change
Traveler's cheques are available in several currencies such as U.S. dollars, Canadian dollars, Pounds sterling, Japanese yen, Chinese Yuan and Euro; denominations usually being 20, 50, or 100 (x100 for Yen) of whatever currency, and are usually sold in pads of five or ten cheques, e.g., 5 × €20 for €100. Traveler'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 traveler'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 traveler'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.
One of the main advantages traveler's cheques provide is the replacement if lost or stolen.
However, this feature has also created a black market where fraudsters buy traveler's cheques, sell them at 50% of their value to other people (such as travelers) and falsely report their traveler's cheque stolen with the company from which the cheque was obtained. As such, they get back the value of the traveler's cheque and make 50% of the value as profit.
The widespread problem of counterfeit traveler's cheques has caused a number of businesses to no longer accept them or to impose stringent safeguards when they are used. It is a reasonable security procedure for the payee to ask to inspect the purchaser's picture ID; a driver's license or passport should suffice, and doing so would most usefully be towards the end of comparing the purchaser's signature on the ID with those on the cheque. The best first step, however, that can be taken by any payee who has concerns about the validity of any traveler's cheque, is to contact the issuer directly; a negative finding by a third-party cheque verification service based on an ID check may merely indicate that the service has no record about the purchaser (to be expected, practically by definition, of many travelers), or at worst that they have been deemed incompetent to manage a personal chequing account (which would have no bearing on the validity of a traveler's cheque).
The widespread acceptance of credit cards and debit cards around the world starting in the 1980s and 1990s significantly replaced the use of traveler's cheques for paying for things on vacation.
In 2005, American Express released the American Express Travelers Cheque Card, a stored-value card that serves the same purposes as a traveler'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 traveler's cheque in electronic form. One of the major examples is the Visa TravelMoney card.
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