Paper Title : “Cheque” in Payment System
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PAPER TITLE : “CHEQUE” IN PAYMENT SYSTEM INTRODUCTORY BACKGROUND: Payment system could generally be described as the combination of various means, mode, materials and methodologies adopted in the settlement of debts, off-setting of due financial obligations, and effecting the transferring of funds from one person/place to the other either directly between the principal parties involved in the transaction or through approved economic agents and financial intermediaries. Both from the ancient world even to the present modern age, the advancement in civilization, developments in hi-technology and rapid response to consumer-centric preferences had made the subject of Payment Systems to have undergone different phases, which indeed, would be of utmost importance to us as practitioners in the financial sector. It would be necessary to recall the days when trade-by-barter was the only means of effecting payment for goods and services that were bought and sold. In fact, after the discoveries of the use of cowries, the insatiable search for better materials to be used in the settlement of debt became intense. And eventually the birth of cash – i.e coin and paper money - came on board, perhaps, presumably to offer panacea to the problems associated with the previous means and mode of settling financial indebtedness and obligation. Nevertheless, it is also worthy of note to understand that in this period of using currencies/cash to settle financial obligations, hi-technological developments have begun to play significant impact on the way we make payments. Increasingly, especially as a result of consumer-centric preferences, the adoption of some technology-driven modes of payments – including but not limited to - wire transfer (internet payments), Direct debits/credits, standing orders, mobile phones, Plastic cards (Credit/Debit/Visa cards), Electronic bill payment, POS/ATM, etc, are in serious use while effecting the transfer of funds and settling indebtedness and obligations. Therefore, within the purview of this discourse, our focus shall be centered on the role that a few of financial instruments (otherwise known as Quasi/Near- money) plays in payment system. These financial instruments include: Cheques, Bill of payment and Promissory Notes, among others. All rights Reserved. An unpublished Paper Delivered by Chris Akenroye Page 1 of 17 PAPER TITLE : “CHEQUE” IN PAYMENT SYSTEM CHEQUE: A cheque (spelled check in American English) is a negotiable instrument instructing a financial institution to pay a specific amount of a specific currency from a specified demand/current account held in the maker/depositor's name with that institution. Both the maker and payee may be natural persons or legal entities. In other words, Cheques are written orders from account holders instructing their banks to pay specified sums of money to named beneficiaries. They are not legal tender but are legal documents and their use is governed by the Bills of Exchange Act 1882, and the Cheques Acts of 1957 and 1992. Although cheques are regulated in most countries as negotiable instruments, in many countries they are not actually negotiable, viz., the payee cannot endorse the cheque in favour of a third party. Payers could usually designate a cheque as being payable to a named payee only by "crossing" the cheque, thereby designating it as account payee only. Note that in an effort to combat financial crime, many countries have provided, by a combination of law and regulation, that all cheques should be treated as crossed, or account payee only, and are not negotiable. HISTORY OF CHEQUE The usage of cheque had its origins in the ancient banking system, in which bankers would issue orders at the request of their customers, to pay money to identified payees. Such an order was referred to as a bill of exchange. The use of bills of exchange facilitated trade by eliminating the need for merchants to carry large quantities of currency (e.g. gold) to purchase goods and services. The ancient Romans are believed to have used an early form of cheque. PARTS OF A CHEQUE Cheques generally contain: 1. place of issue – Bank’s name and/or address 2. cheque and/or control number(s) 3. date of issue 4. payee 5. amount of currency – in words and figure 6. signature of the drawer 7. routing / account number in MICR format - A cheque is generally valid “indefinitely” and literarily for six months (in Nigeria) after the date of issue unless otherwise indicated; this varies depending on where the cheque is drawn. In Australia, for example, it is All rights Reserved. An unpublished Paper Delivered by Chris Akenroye Page 2 of 17 PAPER TITLE : “CHEQUE” IN PAYMENT SYSTEM fifteen months. Also, in Nigeria, Legal amount (amount in words) is not just highly recommended but strictly required when writing a cheque. GENERAL TYPES, FORMS AND CLASSES OF CHEQUES • An order cheque – the most common form of a cheque – is payable only to the named payee (or his or her endorsee, theoretically speaking) as it usually contains the language "Pay to the order of (name)." • A bearer cheque is payable to anyone who is in possession of the document: this would be the case if the cheque does not state a payee, or is payable to "bearer" or to "cash" or "to the order of cash", etc. • A counter cheque is a bank cheque given to customers who have run out of cheques or whose cheques are not yet available. It is often left blank, and is used for purposes of withdrawal. In Nigeria, the use of counter cheque (as directed by the CBN) is restrictively to be issued under certain extreme circumstances. Hence, counter cheque may not be issued on account with incomplete documentation. However, in view of reckless charges being taken by some banks on ‘counter cheque issuances’ coupled with customer’s complaints, the Central Bank of Nigeria (CBN) frowns at the undue issuance of counter cheque by banks in Nigeria. Also, another reason why the usage of counter cheque is not so prevalent nowadays (in Nigeria) is because of customers’ preference for the use of ATM cards to carry out their withdrawals, except in situations where large amount is involved in the withdrawals. This is in consideration of the “charges” that the bank takes on counter cheque (average of N250.00) in juxtaposition to the charges per an ATM transaction (N100,00). • Open cheque – This is a cheque that is written and uncrossed, which is meant for encashment across the counter. • Cross cheque – As preferable by Most people, the issuance of "cross" cheques provides some levels of security. A Cross cheque has two parallel lines drawn across the face of the cheque, meaning that the cheque could not be paid across the counter. Such cheques should be paid into an account before value could be obtained on them. This is otherwise known as General crossing as opposed to Special crossing. • Specially Crossed cheques – Any cross cheque that is written with the words "not negotiable",” “A/c payee only” or a combination of both words, (or it could also carries the bank’s/branch’s address of the payee of account domiciliation along with either of the words - "not negotiable" or “account payee only”) between the two parallel lines across its face portrays a higher level of crossing with stringent import of implications.. This is a good idea, as it tends to reduce the incidences of frauds and provide good audit trail; because it tells the bank that the All rights Reserved. An unpublished Paper Delivered by Chris Akenroye Page 3 of 17 PAPER TITLE : “CHEQUE” IN PAYMENT SYSTEM cheque should not be paid on demand, and must instead be paid into the account of the payee. This means the cheque will go through the clearing system and find its way to the payee's account accordingly. However, if the cheque is not crossed it is considered a legal "negotiable instrument" i.e. almost like cash, the amount named on the cheque can ordinarily be transferred on delivery to the bank, subject to the laws of the country under review. • A payroll warrant refers to certain types of cheques drawn on a government agency and departments its Employees (like Military or civilian Pensioners, etc), especially on payroll matters of transactions. A conventional cheque differs from a typical warrant in that the warrant is not necessarily payable on demand and may not be negotiable. Deposited warrants are routed to a collecting bank which processes them as collection items like maturing treasury bills and presents the warrants to the government entity's Treasury Department for payment each business day. Also, Warrants may be in the Form of Return money warrant or Dividend warrant, etc. They look like cheques and clear through the banking system like cheques, but are not drawn against cleared funds in a demand deposit account. Instead they are drawn against "available funds" so that the issuer can collect interest on the float. • A cheque sold by a post office or merchant such as a grocery for payment by a third party for a customer is referred to as a money order or postal order. • A bank draft – is a cheque issued by a bank on its own account for a customer for payment to a third party. This is also called a cashier's cheque, a treasurer's cheque, a teller’s cheque, or a bank cheque. A cheque issued by a bank but drawn on an account with another bank is a teller's cheque. A cashier's cheque is a cheque guaranteed by a bank. They are usually treated as cash since most banks clear them instantly. Conventionally, such type of cheque could not be dishonoured. That is, Bankers' drafts are cheques drawn directly on the account of a bank rather than the account of a customer.