Traveller's cheque

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A traveller's cheque^[a] is a medium of exchange that can be used in place of hard currency. They can be denominated in one of a number of major world currencies and are preprinted, fixed-amount cheques designed to allow the person signing it to make an unconditional payment to someone else as a result of having paid the issuer for that privilege.

They were generally used by people on holiday in foreign countries instead of cash, as many businesses used to accept traveller's cheques as currency. The incentive for merchants and other parties to accept them lies in the fact that as long as the original signature (which the buyer is supposed to place on the cheque in ink as soon as they receive the cheque) and the signature made at the time the cheque is used are the same, the cheque's issuer will unconditionally guarantee payment of the face amount even if the cheque was fraudulently issued, stolen, or lost. This means that a traveller's cheque can never 'bounce' unless the issuer goes bankrupt or out of business. If a traveller's cheque were lost or stolen, it could be replaced by the issuing financial institution.

The financial institutions issuing traveller's cheques earn income in a number of ways. Firstly, they charge a fee on sale of such cheques. In addition, they can earn interest for the period that the cheques are uncashed, while not paying any interest to the cheque holder, making them effectively interest-free loans. Also, the foreign exchange rate commonly used on traveller's cheques (generally based on rates applicable at the time of purchase) is less favourable compared to other forms of obtaining foreign currency, especially those on credit card transactions (which use a rate applicable at the transaction date). In addition, the setup cost and the cost of issuing and processing traveller's cheques is much higher than for credit card transactions. The cheque issuer carries the exchange rate risk, and normally pays a fee to hedge against the risk.

Their use has been in decline since the 1990s, when a variety of more convenient alternatives, such as credit cards, debit cards, money transfer services, pre-paid currency cards, and automated teller machines that accept foreign cards, became more widely available and easier for travellers to use. Also, as interest rates sharply declined in many developed countries in the late 20th and early 21st centuries, traveller's cheques became much less profitable to issue and thus many issuers scaled back advertising and promoting their use while others stopped selling them altogether. Traveller's cheques are no longer widely accepted and cannot easily be cashed, even at the banks that issued them. The alternatives to traveller's cheques are generally cheaper and more flexible. Travel money cards, for instance, provide features similar to traveller's cheques but offer greater ease and flexibility.
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