What it means
A traveller buys cheques in set amounts, such as $50 or $100, and signs each one at the time of purchase. When spending a cheque, the traveller signs it again in front of the shop, hotel or bank, which compares the two signatures.
The big selling point was protection. If a cheque was lost or stolen, the issuer would normally replace it, provided the traveller had kept a record of the serial numbers separate from the cheques.
Issuers earned money in two ways. They typically charged a fee for selling the cheques, and they kept the cash between sale and redemption, which could be weeks or months, as float (money held that is earning interest for someone else).
The cheques could be issued in foreign currencies, which helped travellers avoid carrying large amounts of local notes. However, exchange rates and commissions at the point of cashing often reduced the value.
Today the product is rare. Debit and credit cards, cash machines, prepaid travel cards and mobile wallets offer wider acceptance, lower fees and faster replacement, so many issuers have stopped selling the cheques.
Those that remain tend to serve travellers to places where cards are less reliable. They are still worth understanding as a financial concept.
The float they created was a significant source of income for issuers, and they remain an example of a liability on a company's balance sheet that is recorded until the cheque is cashed.
In practice
Real-world examples.
Example
A student taking a three-month trip buys $1,500 of traveller's cheques in denominations of $100. She keeps the serial numbers in her email so the issuer can replace them if they are lost. She also leaves a spare card with a relative at home in case of emergencies.
Example
A tour operator in a remote region accepts cheques from guests who have no local bank card. It deposits them at a local bank and receives the funds after a short delay. The operator keeps a log of each cheque and checks the signatures match.
Example
An issuer's finance team prepares year-end accounts and records the value of unredeemed cheques as a liability. It estimates how many may never be cashed and reviews the rules on unclaimed property. Any amounts that remain unredeemed after the legal period may have to be handed to the state.
Formula
Calculation
An issuer's float income can be estimated as:
Float income = Average outstanding cheques x Yield on invested funds
An illustrative issuer has $200,000,000 of cheques sold but not yet cashed, and invests that money at an average yield of 3% a year. Float income is $200,000,000 x 0.03 = $6,000,000 a year. A traveller who buys $1,000 of cheques with a 1% fee pays $1,000 x 0.01 = $10 for the service. If the traveller cashes the cheques at a bank with a 2% commission, the commission costs $1,000 x 0.02 = $20 more, so the total cost is $30.Case study
Seen in the real world.
Westbrook Travel Finance is an illustrative, fictional issuer of traveller's cheques. In its peak year it had $400,000,000 of cheques in circulation, and the interest earned on the float was a major part of its profit.
As card use grew, sales declined by 15% a year. The finance team noticed that its customers were increasingly older, and that merchants were refusing the cheques because of the work involved in checking signatures and processing them.
The board chose to stop selling new cheques and redeem existing ones over time. In the illustrative wind-down, the company kept enough cash to cover the remaining liability and set up a long-term process for handling late claims. The finance director reported the remaining liability to the board every quarter until it fell to a small figure.
Watch out
Common mistakes.
- Keeping the record of cheque serial numbers in the same place as the cheques, which defeats the replacement protection.
- Ignoring exchange rates and commissions, which can make cheques more expensive than a card.
- Assuming they are widely accepted today, when many shops and banks no longer take them. Check with the place you are visiting before relying on them.
Questions
People also ask.
How do traveller's cheques work?
You buy them with money, sign each one, and sign again when spending, and the issuer pays the merchant or bank that accepts them.
Why did their use decline?
Cards, cash machines and mobile payments became widely available, cheaper and easier to replace. Merchants also found the signature checks slow and costly.
Do traveller's cheques expire?
Many do not, but it depends on the issuer, so check the terms before holding them for a long time. If you find old ones, contact the issuer or its successor to ask whether they can still be redeemed.
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