Pay to Order

What Is Pay to Order?

Pay to order describes a check or draft that must be paid via endorsement and delivery. Pay-to-order instruments are negotiable checks or drafts that are generally written as "pay to X or pay to the order of X." The name entered here indicates the specific person, group, or organization that the payer authorizes to receive the money. Pay-to-order instruments stand in contrast to pay-to-bearer instruments, which do not require an endorsement.

How Pay to Order Works

When a payer writes a check, they are providing the bank with specific instructions on how to process the check. By writing a pay-to-order check, the payer is telling the bank to transfer money from the payer's account to the payee. The payee is the person, group, or organization designated on the check to receive the funds.

The Uniform Commercial Code (UCC) outlines rules pertaining to pay-to-order instruments. It specifies that ownership of this type of check can be transferred only via endorsement — someone who accepts a check must endorse it before transferring it somewhere else.

An endorsement for a negotiable instrument, such as a check, requires a signature authorizing the legal transfer of the funds from one party to another.

Pay to Order and the Uniform Commercial Code (UCC)

The UCC is a set of standards among business laws that regulate financial contracts. Most states in the U.S. have adopted the UCC. The code itself consists of nine separate articles. Each article deals with separate aspects of banking and loans, including the processing of pay-to-order instruments. A later addition to the UCC covers electronic payments. The UCC better enables lenders to loan money secured by the borrower's personal property.

Most states ratified the UCC in the 1950s. Louisiana is now the only state that has not fully ratified the code, although it has adopted several of the articles, including those relating to checks, drafts, and other negotiable instruments.

Forms of Check Endorsement

Blank endorsement, restrictive endorsement, and special endorsement are three types of check endorsements.

Blank Endorsement

A blank endorsement is a check that bears the signature of the payer, but does not specify a payee. This enables any holder of the check to assert a claim for payment. Since no payee is specified, such an endorsement essentially turns the instrument into a bearer security. Blank endorsements are much riskier than pay-to endorsements. If the instrument is lost, it can be negotiated (cashed in or deposited) by anyone who finds it.

Restrictive Endorsement

A restrictive endorsement is when the party receiving the check notes “For deposit only” on the first line of the back of the check and then signs their name underneath. This form may only be deposited into an account with the specified name.

Special Endorsement

The special endorsement entails a payer writing the check to give it to a particular person. The recipient of a special endorsement is the only person who may cash or deposit this check. Instructions for a special endorsement are as follows: Write “Pay to the order of [name of recipient]” and sign below.

Benefits of Pay to Order

A pay-to-order check ensures that only the payee specified on the check is authorized to receive payment. This helps protect the payer from an unauthorized person or organization attempting to cash the check and fraudulently withdraw money from the payer's bank account. This also protects the payer from unauthorized claims to the check should it be lost or stolen.

If a bank is unable to verify the identity of the person or organization claiming to be the payee, the bank will not honor the check and will refuse to make payment. This protects both the payer and the bank from check fraud.