Fact Checked

What Does "Pay to Order" Mean?

M. McGee
M. McGee

Pay to order is a finance term that means a single individual, business or group has direct ownership over a specific financial instrument. This means that the specified person or representative must be the person to handle the transfer or dissolution of the document. This is in direct opposition to a pay to barer document, which allows anyone in possession full financial control over the contents. In modern finance, the most common pay to order documents are personal and business checks.

Both pay to order and pay to barer have been around since the early days of banking and large-scale trade. Each of the methods has its own purposes and risks, giving each of them a strong presence all the way to modern day. These terms describe the basic way the end receiver of the payment document approaches the situation.

The most common example of a pay to order system is a check.
The most common example of a pay to order system is a check.

Pay to barer documents are the less common of the two. Using this method, the ownership of a document gives full legal and financial control over the terms within. Originally, these were used when travel was longer and more difficult. The original issuer wouldn’t necessarily know who the person presenting the document to the payer would be. To prevent any possible payment issues, the payee was left open.

The problem with that system generally revolves around theft or greed. Once the document changes hands, the ownership changes as well. When the situation is less trusting, or ownership can’t be assured, people used a pay to order system. This means the document specifies a specific owner and possession has no legal meaning.

The most common example of a pay to order system is a check; in fact, most checks say ‘pay to the order of’ right on them. When a check is written, the payer creates a document that says he owes a specific amount of money to a specific person or group. This document is a set of instructions that a bank will follow when the check is presented. A pay to order check is a contract between the payer, the payee and the bank. This is why checks will often have three signatures when they are cashed; the payer, the payee and a stamp from the bank where the check was processed.

When a person is unable to be present for a pay to order transaction, it is possible to sign the document over to another. The original owner specifies the new holder, signs the document and gives it to the new owner. On a check, this is typically done on the back so a clear line of possession is visible, but the same basic method may be used on any form of pay to order document.

You might also Like

Discuss this Article

Post your comments
Forgot password?
    • The most common example of a pay to order system is a check.
      By: Alex Hinds
      The most common example of a pay to order system is a check.