What is "Endorsing" a cheque and why do you do it in the US?

Factual Questions
41

I think you have it a little backwards.

In the U.S., a negotiable instrument (which includes checks, promissory notes, negotiable bills of lading and all sorts of other instruments) is one which may be transferred by endorsement*.

A negotiable instrument has the language “pay to the order of” a named person (or business). That means the bank it is drawn on will pay the named person or anyone the named person “orders” the bank to pay.

How does that named person “order” the bank to pay another person? The named person “endorses” the check on the back. For instance, if the check is payable to Adam, Adam can write on the back “Pay to Bob, [signed] Adam”, and now Adam will likely be the “holder in due course” of the check, who can, if he likes, endorse it over to Carol by signing below Adam’s endorsement “Pay to Carol, [signed] Bob.”

Normally, someone holding a check doesn’t want to go to the bank the check is drawn on, but rather wants to deposit it in his or her bank. However, the check has to be endorsed to “order” the bank it drawn on to pay it to the bank it deposited in. One way this is sometimes done (usually not, but in some corporate endorsements) is to write on the back “Pay to Deposit Bank, [signed]Depositor.” Before electronic clearing, the bank it was deposited would transfer the physical check to a “clearing house” which would sort the checks and sent them to the banks they were drawn on, and along the way there would be all sorts of stamps directing banks and other institutions along the way who to pay the funds to.

Now we get into bearer instruments. These are instruments that are transferred by simply physically transferring the instrument. The ways that this can be done are writing the instrument as “Pay to the order of CASH”, “Pay to the order of BEARER” or “Pay to the order of [name] or BEARER.” With a bearer instrument, no endorsement is needed. You just have to present the actual instrument.

You can convert an instrument into a bearer instrument by “unrestrictively” endorsing it. The easiest way to do this is just signing the back of the instrument with nothing more than your name. It is an “order” to the bank to pay the check to whoever is the bearer.

A slight variation is a “restrictive” endorsement, which is “For deposit only, [signed]Depositor.” With this endorsement, you can deposit it into a bank (or similar depository institution) for credit to the account of the signer, but not transfer it to anyone else other another depository institution for clearing.

It sounds like the Australian system is to have all checks made out as bearer instruments, but with the words “non-negotiable” restricting the transfer to the payee (or, I guess to depository institutions for the account of the payee).

42

And this is absolutely worthless.

A check/cheque is a draft instrument and it is an unconditional order to pay the payee. The payee is completely free to cross out the “for deposit only” when he or she endorses it. In fact, I have done this. My dad is of the “for deposit only” school and he once wrote me a cheque from which I wanted some of the amount in cash. The teller said, “It says ‘for deposit only.’ You have to cross that out when you endorse it.”

Here’s the issue with endorsement. Once you endorse a cheque, it becomes a negotiable instrument. That means anyone can cash it. If A writes a cheque to B for $50, B can then endorse it and hand it over to C, who can either deposit/cash it, or endorse it and hand it over to D, etc. That’s why you shouldn’t endorse a cheque until you’re standing at the teller’s window.

That’s the law with regard to cheques. For security reasons, any individual bank might have a policy regarding how they will handle endorsed checks from third parties.

43

What Billdo said. So, in the US at least, a check is a negotiable instrument. Otherwise, sorry but, as mentioned in my last post, I’m kind of short on time at the moment. If it helps, the Wiki on negotiable instruments makes no mistakes that I noticed in a quick reading.

44

As a techinical matter, it’s not up to the individual bank, and any properly endorsed cheque should technically be accepted into the appropriate third parties account.

However as a matter of practice it is entirely up to the Bank’s discretion whether they’ll do this. As it leaves the Bank wide open for fraud. While I haven’t been in the retail side of a Bank for 10 years or so, as far back as when I started in a branch in 1993 you’d generally have Buckley’s and none of having a teller accept a third party cheque unless you were well known to the staff of that branch, and/or the third party cheque was drawn on an account domiciled with that branch of that Bank, so the endorsing signature could be confirmed to records.

The one proviso to this is if you deposit the cheque via an ATM, or with a big wad of other cheques, to the extent that the branch staff didn’t notice that the cheque wasn’t made out to you, it would go through, as a cheque payee wasn’t checked once it got past the “front line” of the branch.

45

It’s the preprinted mention “non endorsable except in favor of a bank or an assimilated establishment” (sorry for this broken sentence, but I’m very bad at translating, especially technical terms) and two small oblique bars preprinted on a side of the check (before cheques were preprinted in this way, you would “bar” it yourself by crossing it with a pen. Now, the preprinted bars are small and barely noticeable. And I’ve no clue how two oblique bars originally came to mean “this cheque isn’t transferable”.)
As for why, I’ve absolutely no clue. But quickly looking around, I read that when you order transferable check, the fee you pay is actually paid to the state, not to the bank( apparently, it’s around €1 per cheque). And that the bank has to give to the French equivalent of the IRS the name of the person ordering them and the cheques’ serial numbers. So it might have something to do with preventing tax-evasion or money-laundering. Or maybe it was originally done to solve the issue of stolen cheques. I don’t know.
There’s currently no habit of cashing cheques in France, and I don’t think there ever was. The alternative would have been money orders that used to be very frequently used by everybody to pay for a lot of things or to transfer money, though it became rare since. And people aren’t paid (by their employers, I mean) with cheques. So, I suspect that cheques were rarely cashed or transfered, and only for peculiar and possibly often legally dubious purposes. It might be the reason why it became the norm to provide only such non-transferable cheques, and it’s certainly the reason why nobody cared. Or it might be the banks that insisted on it to avoid a liability. Or all the above. Or something else.
I’m not sure for how long it has been this way. I have the vague idea that when I was a small kid, my parents still “barred” their cheques. In which case, it might have been implemented during the 70s. But I really don’t know for sure.

46

Reading the thread, I notice that the two bars have an equivalent meaning in Australia. So, it seems to be or to have been an universal norm.

47

You’re confused, ascenray. Pochacco is talking about the payee endorsing a check with the notation “for deposit only.” No one suggested (and I’m boggled by the notion) that the author of a check might write such a thing – that would, indeed, be meaningless. I myself endorse checks “for deposit only” with my account number; the idea being that this expressly states that I do not intend to transfer the check to anyone, signifying that anyone who attempts to deposit the check to a different account may have stolen it. This is a prudent precaution when banking by mail, and it was recommended by my bank over 30 years ago.

48

[QUOTE=mbh]
That is the tricky bit. American checks don’t have that bit.

In America, I write a check to Thomas Atkins, payable at my bank.

It is a “bearer instrument”. Only Thomas Atkins can cash it, and only at my bank.

You do realise that any UK soldier can cash your cheques don’t you?

49

Thanks, clairobscur. I think I followed that.

50

On any other message board, this would likely be a coincidence.