What Does “Pay to the Order Of” Mean?

This article was reviewed by Rohit Mittal – co-founder of Stilt, Inc, financial expert, and immigrant. To learn more about Rohit’s credentials, visit his LinkedIn, Substack, and Twitter.

You may have seen the writing on a check that says “pay to the order of” – but what does that mean?

In finance, a pay-to-order document requires a signature from both parties before it can be implemented. A check is a pay-to-order document. You, as the payer, have to sign the cheque to authorize it. Similarly, the recipient of the check has to be at the bank in person to sign for the check, to cash it. These two signatures ensure that the correct person receives the money.

This was not always the most common form of payment. Originally, when travel was longer and more difficult, you would want to avoid possible payment issues. If you didn’t know that your intended recipient could be at the bank in person, you left the payee open. This is either known as a pay-to-bearer check or a blank endorsement check.

A pay-to-order check has many advantages over a pay-to-bearer check. We cover some of these advantages below. 

How Pay to Order Works

Pay to order is used to describe a financial document that needs to be paid via endorsement. In this context, an endorsement is a signature that authorizes the legal transfer of the financial document.

The most common example of a pay-to-order is a check. Most checks include the phrase “pay to the order of” right on them. A check is a financial document that allows for the transfer of money. When you write a check, you are letting the bank know that you owe a specific amount of money to a specific person or group. 

You tell the bank to “pay to X” or “pay to the order of X”. The name entered here indicates the specific person, group, or organization that you authorize to receive the money. This is the opposite of pay-to-bearer financial documents. A pay to bearer does not require a fixed recipient. Whoever holds the document is the owner of the money. The pay-to-bearer system is open to abuse because you cannot guarantee that your intended recipient will receive the money.

The pay-to-order system is an attempt to fix this flaw. You have to sign the check to authorize it, but the recipient also has to sign the check to authorize the legal transfer of the money. The specified person must be the person to receive the transfer. The recipient’s presence and signature are a way of ensuring the correct person receives the money. 

When the recipient is unable to be present for a pay-to-order transaction, you have to sign the document over to someone else. You, as the original owner of the money, specify the new recipient, sign the document, and give it to the new owner.

Pay to Order and the Uniform Commercial Code (UCC)

The Uniform Commercial Code (UCC) consists of nine separate articles. Each article deals with separate aspects of banking and loans. The rules that apply to pay-to-order financial documents are also covered in the UCC.

The UCC rules specify that ownership of a pay-to-order check can be transferred only via endorsement. This means the recipient must be present and must sign the document. If the check is to be transferred, the recipient who accepts the check must sign it before transferring it elsewhere.

Most states agreed to implement the UCC in the 1950s. Louisiana is now the only state that has not fully adopted the UCC, although it does use several of the articles, including those related to checks and other order of instruments.

Forms of Check Endorsement

An endorsement is a signature that authorizes the legal transfer of a financial document. In the case of a check, we say that a check is endorsed when you, as the original owner of the money, sign the check. You are endorsing the transfer of money from your account to the recipient. 

When the recipient cashes the check, they also have to sign the check. They are also endorsing the terms of the agreement – they are confirming they are the intended recipient and that they agree to the transfer of money.

There are different forms of endorsement that are sometimes used when checks are issued. These different forms widen or narrow the rules for who can endorse the check.

Blank Endorsement

In a blank endorsement check, you as the payer signs the check like usual. But you do not specify the person that is meant to receive the money. This means anyone who holds the check can cash the check. This widens the rules for who can endorse the check. Anyone who holds a cheque with a blank endorsement can sign for, and receive, the specified amount of money.

Note that this is not the same as receiving a ‘blank check’. A blank check is already endorsed by you, as the payer, but does not have a monetary value written in. The recipient of the check can endorse this check, but choose what amount they wish to receive.

Restrictive Endorsement

From your side, as the payer, a restrictive endorsement looks the same as any other endorsement. You write the check as usual, with the specific person and monetary value filled in.

The recipient can choose a restrictive endorsement. They can write “for deposit only” on the back of the check, and sign their name underneath. This narrows the endorsement rules, as the check may now only be deposited into an account with the specified name.

Special Endorsement

If you write a check with a special endorsement, you are giving it to a particular person. That particular person, the recipient of the special endorsement, is the only person who can cash or deposit this check. To make a special endorsement, you must write “pay to the order of [name of recipient]” and sign below it.

Benefits of Pay to Order

Pay to order ensures that only the intended recipient is authorized to receive payment. If a bank is unable to verify the identity of the person or organization claiming to be the intended recipient, the bank will not honor the check and will refuse to make payment.

This helps to protect you as the payer from unauthorized persons or organizations trying to cash the check. It is a way of preventing fraud. It also protects you from unauthorized claims if the check is lost or stolen.

The benefits of pay-to-order do not apply to blank endorsements.

Read More

• How to Cash a Check Without an ID
• Where to Get a Cashier’s Check Without a Bank Account
• How to Close Chase Account
• How To Sign Over a Check
• How to Close Bank of America Account
• What is the Chase ATM Withdrawal Limit?

Conclusion

Pay to the order of is a very powerful phrase. It allows you to specify the recipient of your check. If the bank is unable to verify the identity of the recipient, it will refuse to make payment. This protects you from fraud and unauthorized claims in case of theft.

Frank Gogol

I’m a firm believer that information is the key to financial freedom. On the Stilt Blog, I write about the complex topics — like finance, immigration, and technology — to help immigrants make the most of their lives in the U.S. Our content and brand have been featured in Forbes, TechCrunch, VentureBeat, and more.

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