First issued in 1891, Traveler's cheques have been in use ever since thanks to American Express. American Express remains the largest provider of travelers cheques to date, but there are now other providers of this facility including Travelex and Thomas Cook and the post office.
Essentially, a travelers cheque is a letter of credit guaranteed by the financial institution that issues it, yet is similar to a cheque, in that it needs to have the support of the traveler's funds prior to issue.
The currencies that travelers cheques are issued in are limited, but cover the most secure of currencies that are accepted internationally. A UK traveler can exchange pounds for US Dollars, Canadian Dollars, Japanese Yen and Euro, and they are also able to be purchased in Sterling (for the trip back).
When purchasing a traveler's cheque, a person enters into the same transaction as with ordinary foreign exchange, with the only difference being that instead of receiving foreign currency, they receive a cheque or letter of credit in return for their pounds. The travelers cheque provider will apply an exchange rate to the transaction and this will invariably be at a premium price. As it is a retail tier of the foreign exchange market, the issuers of traveler's cheques will generally charge a margin of 2-3 cents (or units) on the exchange rate per transaction. In addition, there may be an administrative fee, which will need to be taken into account when comparing various provider prices.
The advantage of a traveler's cheque lies in its security features. They can be used as cash but provided the recommended process is followed by the traveler, they are protected in the event of being lost or stolen.
As soon as they are purchased they need to be signed by the purchaser, to signify ownership in the cheque. Then the traveler needs to record the serial numbers of the cheques, and store these in an accessible yet safe place. When arriving at their destination, the traveler can cash the cheque with a retailer or vendor that accepts traveler's cheques, or they can be cashed at an overseas office of the cheque issuer.
When cashing the cheque a fee will invariably be applied and will amount to approximately 3% of the value of the transaction.
If a cheque is lost or stolen, the traveler merely needs to advise the issuer of the serial number on the cheque. When this is done, the cheque will be cancelled and a fresh traveler's cheque is provided.
Are travelers cheques secure?
The security of the traveler's cheque is based on signature, and when cashing the cheque, the traveler needs to sign and date the cheque in the presence of the payee. The payee then compares the signature with that already signed when the cheque was issued, and in this manner can verify that the cheque is not stolen. If there is any doubt the retailer can contact the provider and verify ownership.
If a purchase is made and the full value of the cheque is not expended, the traveler will receive the balance from the payee.
While not every foreign retailer will accept traveler's cheques, they are a well accepted financial product that is guaranteed, and so in most countries a traveler will not have issue in cashing the cheque in lieu of local currency. In some countries however, this may prove challenging, and so inquiries ought to be made prior to departure.