Check Payments | B2B Finance Glossary

What Are Check Payments?

A check payment is a form of payment that operates as a negotiable instrument. The party who writes the check is known as the payer or drawer, and the party that the check is written out to is known as the payee or drawee. Checks are written, signed, and dated by the payer, and they direct the associated bank to pay a specific sum of money to the payee. Checks can be cashed immediately or deposited into the payee’s bank account.

When Were Checks First Invented?

Checks are one of the oldest forms of payment, and some even believe checks were used by the ancient Romans. The Bank of England was the first financial institution to issue pre-printed checks in the early half of the 18th century, and the oldest American checks on record date back to the end of the 18th century. The checks we use today became popular in the 20th century, and check usage became very popular in the 1950s when check processing technology became automated. Check cards were created in the 1960s and operated as the predecessors to debit cards.

How Do Checks Work?

A check is a document written by the payer and promises the payee a certain amount. Using a check allows two parties to transact between them and transfer funds from the payer’s bank account to the payee’s account – all without transferring cash back and forth between them. This is why checks are typically used when the transaction involves a large sum of money: they eliminate the need for cash payments to happen in person.

What Are the Common Characteristics of Check Payments?

Most checks share the same characteristics, even though not every check looks the same or is written for the same purpose. Every check requires the name and contact information of the payer. This information is usually located at the top-left corner of the check and is pre-printed on the checks when the payer orders them from his or her bank. The payer’s bank information can be found pre-printed on the checks as well.

There are also blank sections for the payer to fill out on each check. These include the date on which the check is written, who the payment is being made to, the amount that the check is written for in numerical form, the amount the check is written for in word form, and the payer’s signature. There is also the option to write a memo, usually found in the bottom left corner of the check. This allows the payer to specify what the check is for or include any reference number.

At the bottom of every check are a series of coded numbers. They represent the bank’s routing number, the payer’s account number, and the check number.

Finally, the back of the check includes an endorsement line – a place for the payee to sign when he or she is depositing the check. After the payee signs the check, the payee’s bank stamps the back of the check with a deposit stamp, and from there, it is sent to clearing. Once the payer’s bank receives the check, it is once again stamped, and then it is filed.

What are the different types of checks?

There are many different types of checks, but here are the three most common types:

• Payroll checks. A payroll check is most commonly known as a paycheck. This form of check payment is used to pay employees for the work they do for a company. Payroll checks are most commonly issued biweekly, but it’s up to every business to decide how frequently they will pay their employees and contractors. Today, most paper payroll checks have been replaced with direct deposit options and other forms of digital payments.
• Certified checks. A certified check is guaranteed not to bounce because it verifies that the payer has enough funds to make the transaction. To certify a check, a payer will have to present the check at the bank on which it is drawn so that the bank can verify its authenticity with the payer.
• Cashier’s checks. Cashier’s checks are most commonly used for large purchases, such as a car or real estate because they are guaranteed by the payer’s bank and signed by the bank’s cashier. This means that the payer’s bank is responsible for the funds. These checks are usually required for large payment sums because they guarantee the funds are available and usually debit the payer’s account immediately.

How Are Checks Most Commonly Used?

Even though digital payments are on the rise, checks remain widely used. 40% of all B2B payments are still made via paper check. However, check payments are very insecure and are tampered with 74% of the time. On top of that, check payments are very slow since most are sent through the postage system. This can increase DSO for companies relying on check payments for revenue.

If you’re a B2B company looking to shift your paper check payments into a digital solution that eliminates mail float and extended DSO periods, schedule time to speak with one of our payment specialists today.