Money Order

What It Means

A money order is a means of payment for a prearranged amount of money. It is much like a certified check (for a fee, a bank can certify that the funds exist in a depositor’s checking account in order to assure the person receiving payment that the check will clear; the bank sets aside the funds for that particular check written on that account), except that the money for a money order is prepaid. A money order can be made out to a specific individual or institution, and the institution issuing the money order charges a fee for its services. People who do not have personal checking accounts often use money orders to pay bills and make purchases. Money orders may be purchased in specific amounts at banks, post offices, and other qualified institutions (many independent companies, such as Western Union, sell money orders through supermarkets, convenience stores, and other retail outlets).

A money order is a fast, reliable, and convenient way of transferring a small sum of money (most institutions sell money orders for up to $1,000) between payor (the person making the payment) and payee (the person receiving the payment). It is particularly useful for sending money through the mail because it can only be redeemed, or cashed, by the designated payee, with valid identification (such as a driver’s license or passport). Money orders are also considered more secure for the payee than personal checks because the order is prepaid by the payor and the payee is actually receiving his or her payment from the bank, postal service, or other institution. According to the Federal Reserve (the central banking system of the United States), 889 million money orders were purchased in the United States in 2005; the gross value of these transactions (including processing fees) was $145 billion.

When Did It Begin

The U.S. Postal Service (USPS) introduced money orders in 1864, at a time when Civil War soldiers in the field were having difficulty sending money to and receiving money from their homes. (Bank checks were almost unheard of then, and an envelope containing cash was likely to arrive with a slit in the side and the money gone.) Originally sold almost exclusively in army camps, money orders were soon in demand across the country because they were the most expedient and secure way of sending money through the mail. In 1869 the USPS expanded its service to include foreign money orders, which were extremely popular with immigrants.

In 1882 the American Express Company introduced a money order of its own, which rivaled the postal service money order because it was more secure (postal money orders were more vulnerable to being altered) and could be bought and cashed at a wider number of locations.

More Detailed Information

Here is an example of how a money order works. Linda needs to pay her utility bill in the amount of $215.63, but she does not have a checking account. Linda, the payor (the person who wishes to use the money order to make some kind of payment) goes to the post office and requests a money order in the amount of $215.63. Linda must pay the post office $215.63 plus a small service fee based on the amount of the money order. In 2007 the U.S. Postal Service charged $.95 for money orders under $500 and $1.30 for money orders between $500.01 and $1,000.

Linda’s money order is printed by a machine in the specified amount. Some issuers require that the name of the payee be printed on the money order at the time of purchase, but others allow the payor to fill in this information later. Linda receives the money order, which she must complete and sign before mailing or delivering it to the power company. Note that a completed money order cannot be changed or altered. Along with the money order Linda receives a receipt for her records, and a third copy is kept by the issuer. Linda may also request that a photocopy of the redeemed money order with the payee’s signature endorsement be sent to her for her records. When the power company receives the money order, they will deposit it into a bank account. A payee may also choose to redeem a money order for cash at the post office or other issuing location.

A money order has no expiration date. Each money order has a unique serial number that may be traced in case of loss or theft. If the payor keeps his or her receipt as proof of purchase, a record of the serial number, or both, he or she can request a refund for the money order if it is not redeemed.

Like cash, money orders contain various security features so that they may not be counterfeited. Postal money orders (PMOs) issued by the USPS in particular are considered among the most difficult financial documents to counterfeit. Security features of a PMO include watermarks (images of Ben Franklin that can be detected when the document is held up to the light), a dark security thread that runs alongside the watermark with the tiny letters “USPS” facing backward and forward, and a rainbow of inked patterns and tones. If any of these features is not present when the document is held up to the light, it may be counterfeit.

Recent Trends

Between 2004 and 2006 there was a significant surge in fraud schemes involving fake PMOs, in spite of the highly touted difficulty of counterfeiting them. FBI (Federal Bureau of Investigation) and postal inspectors reported that much of the counterfeiting seemed to originate in Nigeria, Ghana, and Eastern Europe. Most of the schemes did not involve attempts by swindlers to redeem the bogus money orders themselves; rather, the worthless money orders were used to pay for merchandise being sold over the Internet. In a typical scam the merchandise seller receives a counterfeit PMO in the mail that is printed for a value greater than the price of the item being purchased. The seller is asked to deposit the money order, keep the cost of the item, and send the excess balance back in cash along with the merchandise.

In April 2005 law enforcement officials estimated that the postal service had intercepted millions of dollars worth of counterfeit PMOs being sent through the mail.