Just what is a Check?
While many money services businesses cash checks, many people involved in smaller companies participating in this business have limited knowledge of just what makes a “check” a “check”.
Simply put, a check is an order written by a person that directs a bank to debit that person’s account by a specified amount and make a payment of that same specified dollar amount to the order of a certain person(s). Terms to know are:
- “Drawer” – the account holder writing the check.
- “Maker” – another name for the “Drawer”; again the account holder writing the check
- “Drawee” – bank in which the account is held; responsible for paying the check
- “Payor” – the bank to which a check is presented for payment, “drawee”
- “Payee” – the person(s) to whom the check is payable
(Less) Simply put, a check is an order written by a “drawer” that directs a “drawee” to withdraw an amount of money and pay it to one or more named “payee(s)”.
When a check is presented to the “drawee”, it is responsible for ensuring that the person presenting the item is entitled to the proceeds of the order, i.e. the person (s) is in fact the payee. The payee is expected to “endorse” (aka “indorse”) the check in order to transfer ownership interest in the check. The bank will determine whether funds are in the account and available prior to paying the item.
When a money services business cashes a check, it is expected to ensure that the person presenting the item is a “holder in due course” – most typically the payee(s) listed on the check.
The MSB will then include the check in its deposit to its bank whereupon it will ultimately be presented to the “Payor” bank. Assuming that there has been no stop payment, no fraud, and that funds are available, the story ends there. If, however, there are insufficient funds, no funds, a closed account, a determination that the check is fraudulent, or there has been a stop payment, the check will be returned to the MSB’s bank which will then debit the MSB according to the terms of the MSB’s account agreement.