Checks: A Guide to their use, functions, and types

What Is a bank check?

A check is a document that contains a written instruction to a bank to pay a specified amount of money. The bank will issue the stated amount to the check holder or the individual named on the check.

According to Bank Indonesia (BI), a check is an unconditional written instruction from a customer to a bank to pay a specified amount of money upon presentation. In other words, the issuance of a check does not depend on any conditions.

Checks are a form of cashless payment that serves as a substitute for physical money. They can be cashed or deposited into a bank account. Bank checks are typically used for payments or financial transactions involving large sums.

In addition, bank checks operate under three main principles:

• Means of Payment: They can be used for cash payments or money transfers.
• Transferability: Checks can be endorsed and transferred to another party.
• Issued in Local Currency: In Indonesia, checks are issued in the local currency, the Rupiah.

The issuance and cashing of checks involve three main parties:

• Check Issuer (Drawer): The party that issues the check. This can be an individual or an organization with a bank account.
• Payee: The recipient of the payment or transfer of funds. This can also be an individual or an organization.
• Drawee Bank: The bank authorized by the check issuer to disburse or transfer the funds based on the issued check.

Functions of bank checks

As a means of payment, bank checks can be used for various financial transactions. Here are some important functions of bank checks that you should know:

Simplifying financial transactions

Bank checks facilitate financial transactions without requiring the use of debit or credit cards. Unlike debit and credit cards, there are no administration fees or interest charges with checks. All you need to do is bring the check document with you and present it to the clerk for cashing.

Facilitating cash withdrawals

A check makes it easier to withdraw money. Issuing an unconditional check ensures that you have easy access to the funds you need. However, it is important to keep checks safe and not give them to unauthorized persons.

Serving as proof of payment

Another important function of bank checks is that they serve as valid proof of payment. Once a check has been cashed by the bank, it can be attached as proof of transactions in your company’s financial records. Checks can also be used as proof of payment for financial audits.

Types of bank checks in Indonesia

According to Bank Indonesia, checks are classified based on their type and payment method. Below are the types of checks along with their explanations:

1. By type

Checks are categorized into Order Checks and Bearer Checks.

a. Order check

As the name implies, an Order Check specifies the name of the recipient entitled to receive the amount to be paid by the authorized bank. The recipient can be an individual, an organization, or an institution. The authorized bank is obligated to pay the stated amount only to the person or entity whose name is mentioned on the check.

b. Bearer check

Unlike an Order Check, a Bearer Check does not include the recipient's name. The authorized bank releases the funds to whoever presents the check for payment. In this case, anyone holding the Bearer Check can claim the funds, provided the amount matches what is stated on the check.

2. By payment method

Checks can also be categorized based on the payment process. Both the issuer and the payee can impose restrictions on who may receive the payment or cash the check. This is done to enhance security and prevent misuse by unauthorized parties.

Based on the payment process, checks are classified into Crossed Checks and Account Deposit Checks.

a. Crossed Check

A Crossed Check restricts the recipient by marking two parallel lines at the top of the check. Crossed Checks are further divided into General Crossed Checks and Special Crossed Checks.

• General Crossed Check: This type of check features two crossed lines without any additional text or details. The bank that issued the check can either pay the amount in cash or transfer it to another account at the same bank or a different bank.
• Special Crossed Check: This type of check has two crossed lines with the name of a specific bank indicated. The authorized bank can only pay the amount to the payee through the bank specified on the check. The specified bank can either be the issuing bank itself or another bank.

b. Account deposit check

An account deposit check limits payments strictly to account transfers. These checks typically include the note "To Be Deposited Into Account" at the top of the document.

In this case, the bank that issued the check cannot pay the amount in cash but is only permitted to transfer the specified funds to the bank account listed on the check.

Formal Requirements of a Check and Check Example in Indonesia

According to Bank Indonesia and the Indonesian Commercial Code (Kitab Undang-Undang Hukum Dagang or KUH Dagang), several formal elements or requirements must be fulfilled for a document to qualify as a check. If a document does not meet these formal requirements, it cannot be recognized or used as a valid check.

Below are the formal elements required in a check:

• The word "Check" on the document, typically found at the top.
• An unconditional instruction to the drawee bank to pay a specified amount of money, usually phrased as:
• "Upon presentation of this check, pay to... the amount of..."
• The name of the drawee bank, typically located at the top of the document.
• The place of payment, usually near the name of the drawee bank at the top of the document.
• The signature of the drawer, generally located at the bottom of the document.
• The date and place of issuance, typically found at the top of the document.

Below is an example of a check based on the elements listed above.

Important considerations on the subject of bank checks

When discussing bank checks, there are several important aspects to consider, including check clearance, validity, remittance and cancelation. Below you will find a detailed explanation of these points:

1. Check clearance

The holder of a bank check can cash it at the place of payment indicated on the check document. If no place of payment is indicated on the check, the holder may cash the check at the head office of the authorized bank.

Thanks to technological advances, checks can now be cashed by the drawee bank without the need to cash them in person at the head office.

2. Validity of checks

According to Article 206 of the KUH Dagang, a bank check has a presentation period of 70 days from the date of issue and expires six months after this period.

The presentation period refers to the period within which the holder can present or cash the check. During this period, the issuer cannot cancel the issued check. If the presentation period has expired, the holder can still cash the check as long as the drawer has not canceled it.

Six months after the presentation period has expired, the check expires and the drawer is no longer obligated to provide funds for payment.

3. Check transfer

Checks can be transferred from one holder to another. In the case of bearer checks, the transfer can be made simply by handing over the check.

There are two ways to transfer order checks:

• Endorsement: with or without the "to order" clause, the check can be transferred by adding a signature (endorsement). The endorsement can be a special endorsement where the name of the new holder is indicated or a blank endorsement where no name is given.
• Assignment agreement (Acta Cessie): For order checks with the "not to order" clause, the rights to the check can be transferred by concluding an assignment agreement based on Article 613 of the Indonesian Civil Code (KUHP).

4. Changes to checks

The issuer of the check may change the content of the check. This can be done by crossing out the existing handwritten text and adding the changes. The drawer must sign next to the changes to confirm them.

There is no limit to the number of changes a drawer can make to a check. However, the number of corrections to a Bilyet Giro is limited to three, as per the guidelines in the Bank Indonesia circular (SEBI).

5. Cancelation and blocking of checks

The drawer may cancel a check after the expiry of the presentation period i.e. 70 days from the date of issue. Cancelation may also be requested if the check is lost or stolen.

To cancel a check, the drawer must submit a written request for cancelation to the authorized bank. The request must include the check number, the date of issue, the amount and the date on which the cancelation becomes effective. A copy of the account holder's ID must also be enclosed.

To block a check, the drawee must submit a request for blocking along with a police report. If there is evidence of criminal activity, the drawer must also include a letter from the appropriate authority.

How to use bank checks safely

Using bank checks safely is important for both the drawer and the holder to avoid financial risks such as fraud or theft. Below are some steps to ensure the safe use of bank checks:

1. Ensure sufficient funds in the account

Before writing a check, make sure you have sufficient funds in your bank account. It is the issuer’s obligation to provide the holder with sufficient funds as a guarantee of payment.

If the drawer's account does not have sufficient funds at the time of clearing during the deposit period, the check will be rejected and considered bounced. A bounced check is a check that is rejected for payment or transfer due to insufficient funds. In addition, the account holder may be listed on the national blacklist (DHN).

If there are still insufficient funds, the issuer may issue a postdated check. A postdated check indicates a future date agreed upon by both parties. Example: The date on the check is December 15, 2024, but the issuer delivered the check to the drawer on December 10, 2024

2. Keep checks in a safe place

Since checks can easily change hands, you should keep them in a safe place. This is especially important for bearer checks, which can be cashed by anyone who has them. Do not store checks in random or insecure places and handle them with care.

3. Fill out the check correctly and according to the requirements

If you are a check drawer, make sure that you complete the check correctly and in accordance with the formal requirements. Provide all the required information, in particular the name of the payee, the payment amount and the authorized bank. check your details to avoid subsequent corrections.

4. Only give checks to trustworthy persons

Make sure that you only issue checks to trustworthy persons, regardless of whether you are the drawer or the holder. As the drawer, make sure that the check is made out to the correct payee. If you are the holder and cannot cash the check yourself, delegate this task to someone who is absolutely trustworthy.

5. Check the details on the check before cashing it

As the check holder, check the information on the check before you cash it. Confirm the place where the check is to be cashed and ensure that you visit the authorized bank specified on the document. Also, do not miss the deadline for cashing the check.

Manage payments more effectively with Aspire

Checks are a traditional non-cash payment method that remains popular among the public. However, for business transactions, payments via checks are often considered inefficient as business owners must visit the bank to cash the funds. For this reason, businesses—including yours—can benefit from more efficient payment methods capable of transferring large sums, just like checks.

To manage your business payments and finances more effectively, you can leverage Aspire. With just one account, you can handle online payments for both incoming and outgoing cash flows.

For incoming cash flows, you can take advantage of Aspire’s Receivables Management feature. This tool allows you to effortlessly manage invoices and send them to your business partners. You can also share Payment Links with your partners, enabling them to settle payments using their preferred method.

For outgoing cash flows, Aspire offers a variety of interbank transfer methods, such as Sistem Kliring Nasional Bank Indonesia (SKNBI), Real-Time Gross Settlement (RTGS), and BI Fast. Aspire automatically selects the best transfer method based on the amount you input on the dashboard.

To further enhance financial management, Aspire integrates seamlessly with leading accounting software. This integration simplifies financial record-keeping and helps you generate accurate financial reports, saving you valuable time and allowing you to focus on growing your business.

Aspire offers many other outstanding features to help your business thrive. Want to learn more? Contact our team today!