1. Terminology

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.

2. History

Traveler'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 traveler's cheques.^[2]

American Express developed a large-scale international traveler's cheque system in 1891, to supersede the traditional letters of credit.^[3] 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 1850s 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.

Several brands of travelers cheques have been marketed; the most familiar of those were Thomas Cook Group, Bank of America and American Express.

2.1. Declining Use

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.

3. Usage

3.1. 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 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. 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.

3.2. Cashing Cheques

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.^[4]

3.3. Denomination and Change

Traveler's cheques are available in several currencies such as United States dollar , Canadian dollars, pounds sterling, Japanese yen, Chinese yuan and euros; 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.

3.4. 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.

4. Security Issues

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.^[5]

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 cheque 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).

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]

5. Alternatives

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.^[7]