A cheque is a written instruction from the drawer (issuer) to their bank (drawee) to pay a specified sum to the payee. Cheques are considered a traditional method of payment and provide flexibility in high-value transactions. While widely used for many years, their usage has declined significantly with the rise of electronic payment systems.
- Key Parties:
- Drawer: The person or entity issuing the cheque.
- Drawee: The bank responsible for processing the payment.
- Payee: The recipient of the funds.
- Sometimes, third parties such as endorsers or custodians may be involved, especially in complex transactions.
The cheque’s processing cycle includes depositing by the payee, verification by the drawee bank, and eventual payment if funds are available. Cancelled cheques serve as evidence of completed payments.
Advantages of Cheques
Despite their declining popularity, cheques have certain advantages:
- They allow deferred payments, offering flexibility for the drawer to manage funds.
- They provide proof of payment, as cancelled cheques can act as receipts.
- Cheques are especially useful for high-value transactions or situations where digital methods are unavailable.
However, these benefits are often outweighed by their drawbacks, particularly the time and cost involved in manual processing.
Decline in Cheque Usage
The use of cheques has been steadily declining worldwide since the 1990s due to the rise of faster and more efficient electronic payment systems. For instance:
- Asia: Many countries, such as Japan and South Korea, bypassed cheque systems altogether by adopting advanced digital payment methods. India, which had a high prevalence of cheques, is also shifting toward electronic systems.
- Europe: Cheques are nearly obsolete, except in the UK, France, and Ireland. The UK even considered phasing out cheques by 2018 but retained them for customer convenience.
- North America: While the U.S. relied heavily on cheques in the past, their use has significantly declined. In Canada, cheques now account for only 40% of total transactions.
- Oceania: New Zealand phased out cheques entirely in 2020, while Australia plans to eliminate them by 2030.
Reasons for Decline
- Digital Payments: The convenience of online banking, mobile apps, and credit/debit cards has replaced cheque usage for most transactions.
- Cost: Banks discourage cheques due to high processing costs compared to electronic payments.
- Security Risks: Cheques are vulnerable to fraud, including forgery and cheque-kiting schemes.