Cheques – What You Need to Know
Canada has one of the most efficient cheque clearing systems in the world and, while the use of cheques has been declining with the growing popularity of electronic and card payments, financial institutions in Canada still process nearly one billion cheques every year.
A cheque is an agreement between two individuals or organizations to make a payment. The banks have no involvement in the agreement between you and the person who owes you money, but simply act on the instructions provided by the cheque and withdraw the money from one account and deposit it into another. Consumers have a responsibility to track the cheques they write or receive and notify their bank if there is any problem.
For example, if someone owes you $50 they can write you a cheque, which is their agreement to pay you $50. It is your choice to accept a cheque or another form of payment including cash or direct deposit. Many people think that banks can intervene if you have a problem with a cheque, but this is not always the case.
Account terms and conditions usually require account holders to check their statements and advise the bank of any errors within 30 days, so you should make a point of reviewing your bank account statements on a monthly basis or online anytime.
The vast majority of cheques are processed and cleared without incident, and cheques remain a reliable method of payment for those people who prefer to use them. However, occasionally people do have problems with the use of cheques and may have questions about how to resolve these problems. Your bank will do what they can to help and provide you with advice, but here is some information that may also help.
Individuals are responsible for the cheques that they cash or deposit in their bank accounts. For most people, their bank will give them access to some or the entire amount of the cheque right away. This is called provisional credit and the bank is letting you use funds that it has not yet received from the cheque writer’s bank. The cheque will then be processed and your bank will send it to the bank of the person who wrote the cheque, that bank makes sure that the cheque is legitimate and there are enough funds to cover the cheque, and then sends the funds to your bank.
If there is not enough money in the cheque writer’s account to cover the cheque, the cheque will be returned to your bank as NSF or non-sufficient funds. If your bank had given you immediate access to the funds, it will then adjust your balance by removing the provisional credit they had given to you. It is your responsibility to arrange for payment from the cheque writer.
Sometimes a post-dated cheque is deposited before the date on the cheque. Banks have processes in place to look for post-dated cheques and do their best to make sure they aren’t processed early. However, more than two million cheques are processed each day in Canada so it isn’t practical to manually look at the date on each one. If banks did this, it could interfere with the efficiency of the cheque-clearing system.
Customers have a role to play in detecting post-dated cheques that are cashed early. It is advisable to regularly review your transactions through online or telephone banking or at an ABM. If a post-dated cheque you wrote is inadvertently processed before its date, you should contact your bank to let them know. The cheque can be returned and the amount credited back to your account up to the day before the date written on the cheque.
It is possible for a cheque to be legitimately cashed by someone other than the person named on the front of the cheque if it is counter-signed. For example, if you write a cheque to John Smith, he can endorse the cheque on the back and give it to Susan Yu in payment of a debt. Susan can then endorse the back of the cheque and deposit it into her account. This counter-signing of cheques is permitted in Canada. To protect against someone fraudulently doing this, John Smith can write “For deposit only to account of payee” with his signature, and then the cheque can only be deposited into his account. Check with your financial institution to find out if counter-signed cheques are accepted.
A “stop payment” is a service provided by your financial institution, usually for a fee, to prevent a cheque you wrote from being cashed. However, if a stop payment is put on a cheque, there is no guarantee that it will be stopped, or that the funds will not be withdrawn from your account.
For a stop payment to work, your request must be made and processed before the cheque is cashed. Occasionally, a cheque with a stop payment may still be cashed if incomplete or incorrect information is given to your bank regarding the amount or date of the cheque, or to whom the cheque was written.
If a stop payment doesn’t work and your cheque is cashed, you are still responsible to your financial institution for the amount owing. In order to get the money back, you will have to contact the person or organization to whom you wrote the cheque.
Sometimes criminals will create fraudulent cheques or change the name or amount of a legitimate cheque. Either way, this is fraud. There are a number of steps that you can take to protect yourself from cheque fraud:
- Keep your cheques in a secure location
- Review your monthly bank statement or regularly check your transactions through online or telephone banking. If you see transactions you didn’t do, notify your bank immediately and they will investigate.
- If you close your account, shred any unused cheques
- Consider electronic payments such as wire payments, direct deposit of payments, pre-authorized payments for bills or e-mail money transfers as they are more secure than cheques.
- If you receive a cheque that doesn’t look legitimate, ask for a different form of payment.
There are a number of security features built into cheques to help prevent fraud. Banks will try to detect fraudulent cheques, but it isn’t always possible to do so until it goes through the cheque clearing system.
You are responsible for all the cheques deposited into your account. While your bank may provide you with provisional credit, giving you access to the funds right away when you deposit a cheque, the provisional credit will be removed from your account if the cheque is found to be fraudulent when it is processed. This could happen in a few days or significantly longer if the cheque is written on a foreign bank account. It is then your responsibility to get payment from the person or organization that owes you money.
- The Canadian Payments Association has created a video to explain how cheques travel through the Canadian payments system, why those cheques are “image-conscious” and what happens if they hit a bump in the road.