How Do Money Orders Work? Complete Guide

Money Orders

Do you need to send money to someone today? For most of us, it’s as easy as logging into our online banking platform app and making a transfer to a recipient. Let’s throw a spanner in the works with that scenario. What if you’re trying to send money to someone that doesn’t have a bank account?

This situation is ideal for using a money order. The financial instrument allows you to send money to anyone locally or abroad, without using a bank transfer. Financial institutions and retail outlets issue money orders – allowing people to send and receive cash without using a bank account.

Who Benefits from Money Orders?

The first issue of money orders was American Express, back in 1882. The instrument allows Americans to use money orders as payment for personal and business debts. As banking grew over the following century, money orders became a favorite way for travelers to take funds out of the country and cash them in foreign destinations – leading to the development of traveler’s checks.

Money orders are indispensable for the unbanked, which account for more than 10-percent of all U.S households. Mississippi leads the nation in unbanked and underbanked households, with over 16-percent of the State’s residents refusing to utilize the banking system for several reasons, the most prominent being, unemployment levels, and poverty.

Money orders help migrant workers send money back to their families in foreign countries, and they provide business owners with a means to pay unbanked workers. Money orders are safer than carrying around large amounts of cash and their any easy way to send some money across the country or overseas.

A money order is a state-backed financial instrument that entitles the payee to receive cash on demand. This financial instrument also works like a check, in the sense that the person purchasing the money order reserves the right to stop payment.

Money Orders Explained

So, how do money orders work? Purchasing your first money order is secure and easy, and millions of Americans use this financial instrument every day. First, you need to find a bank, post office, or grocery store offering the service. Each of these vendors has individual charges for sending money through their network.

The vendor sends all the details of the transaction to the financial institution responsible for handling the money order

The buyer of the money order needs to register with the service provider by giving their full name, contact number, and in some cases, identification number or social security number.

The buyer then hands over cash to the vendor, and the vendor takes the details of the recipient. Depending on the type of system in use by the vendor, the recipient may receive a text message saying they have funds waiting for them.

The text message will typically have a serial number and a PIN code required to unlock the money order and confirm the identity of the recipient.

Most money orders have a limit of $1,000, and if you need to send more money, then you will need to use multiple orders to clear the necessary amount of funds you need to send to a recipient.

When using money orders, the fees are for the payee’s account, and you should factor this into account when placing your order. It’s also important to note that a credit union or bank will usually charge more if you use them instead of the post office or a grocery store.

Always keep your receipt for your money order, or you have no proof that you ever made the transaction.

The Pros and Cons of Money Orders

Money orders compete in the same markets as other financial instruments such as traveler’s checks, bank drafts, wire transfers, and cashier’s checks.

Over recent decades, the use of checks as a form of payment is fading into obscurity. With the rise of internet fraud, fewer people are inclined to want to pay with checks because it displays their account number and routing information. This feature makes checks a liability for anyone concerned about identity theft or fraud.

Money orders are a much safer alternative to paying by check, and they hold no personal information about the purchaser. While this makes them far more secure than checks, it also makes them harder to find the purchaser if something goes wrong and the payee needs to contact the purchaser.

As a result, it’s harder to track money orders than checks. When you issue a check, all you need to do is log in to your account and see if it’s cleared. For the same type of service, you’ll need to pay additional fees to your service provider for tracking. USPS noticed the need for monitoring, so they included the service on their website, allowing people to track the status of the money order.

How do banks Work?

Read: How Do banks Work?

Where Can I Apply for a Money Order?

Money orders are available for purchase from grocery stores, credit unions, banks, and the United States Post Office. Most of these vendors offer dedicated money order counters where you can buy and cash a money order, while some retailers and grocers let you purchase money orders at the checkout till.

Breaking down the costs associated with sending money orders, we can see that the banks charge the highest fees. While this probably does not come as much of a surprise, it’s quite clear from the banks pricing model that they don’t want to deal with this niche of the market. Banks charge around $5 per transaction, that’s nearly four times the amount charged by other vendors.

Walmart seems to come in as the lowest cost provider, offering money orders for as little as 88-cents a transaction. The USPS is also a low-cost provider, with money orders up to the value of $500 coasting the sender $1,25, and amounts from $500 to $1,000 costing $1,70 in fees.

Veterans and military personnel receive generous discounts at most locations, with the Post Office offering money orders for 45-cents. Western Union also provides excellent value with fees of $1 per order.

Some banks like Chase may offer their premium account holders, money order services for free, but most of the banks charge upwards of $5, and they typically only sell money orders to their account holders.

What You Need to Buy a Money Order

Before you head out to place your money order, make sure you have the name of the payee and the amount you want to send, as well as cash on hand to pay the vendor for the order and the fees.

Most vendors now accept debit cards for payment of money orders, but the recipient still receives cash on the other end of the transaction. Some vendors allow you to purchase money orders with credit cards, but it may incur additional costs.

Always keep your receipt for your money order. Without your proof of purchase, you have no physical evidence that you made the payment, and tracking down your payment details from an institution like the post office or bank could end up taking months.

Your receipt will also have a tracking number you can use to verify that the recipient received the funds. If you lose your money order or someone steals it from your possession, then you can stop the order at any time by calling the vendor with the receipt information.

Cashing Money Orders

When cashing out a money order, you’ll need to prove you’re the recipient of the order by producing the serial number for the transaction, and in some cases, a PIN to unlock the funds.

Any location you visit will most likely ask you for your identification, so don’t forget to take your drivers license or ID card with you. Foreigners traveling through the country looking to cash their money orders will require their passport to release the funds.

The best idea when cashing money orders is to use the issuing institution for the transaction. You have the opportunity to cash out your money order at participating grocery stores and retail vendors, but you need to be aware of hidden fees.

If you don’t need the money right now, and you own a bank account, consider depositing the order directly into your account at your local branch – much in the same manner as you would do with a check. Most offices accept USPS money orders, and select ATMs also allow you to deposit through them as well.

The most crucial tip for depositing money orders at the ATM – Always sign the back of the money order.

When cashing a money order at the grocery store or other locations where there is minimal security, pay attention to your surroundings while the store attendant finalizes the transaction. Be wary of any individuals hanging around looking in your direction. Some unsavory characters may follow from the store and mug you for your money.

Don’t be a Victim of Money Order Scams

It’s quite easy to create a fake money order using Adobe Photoshop, so be careful when accepting money orders as payment for goods. Should decide to accept money orders, always verify the funds before releasing the merchandise.

Try to avoid changing money orders with strangers, particularly for transactions that may seem out of place or shady. Watch out for red flags such as payees wanting to send you money back claiming you’ve overpaid, or visual clues like missing watermarks on money order receipts.

If a vendor refuses to cash a money order, call the issuer of the funds to see if the transaction is legitimate.

Special Considerations and AML Regulations

You don’t need to cash your money order at the same institution that issue’s the instrument. Payees can choose to cash out their money orders at any participating retail outlet or financial institution. Payees also have the option of holding their money order without cashing it, allowing them to deposit it directly into their account.

Many international financial service providers and institutions, such as Amex and Western Union offer international money orders to their customers, allowing them to purchase the money order in America, and cash it out anywhere in the world at one of the foreign branches.

It’s for this reason that traveler’s checks became so popular before the advent of the internet and improvements to global payments systems. Money orders are an inexpensive and efficient way of sending money anywhere in the world.

However, the IRS and the Chinese government are starting to pay close attention to money orders. Many mainland Chinese are attempting to use systems like money orders and prepaid cards to circumvent capital controls regulating moving currency in and out of the country.

It’s a common practice for wealthy Chinese wanting to exit their capital from China to purchase thousands of money orders or prepaid cards in China, then cashing them outside the country in locations like Hong Kong, Vancouver, and the United States.

A Chinese businessperson may buy thousands of cards and ship them to family members or associates in other countries, where they withdraw the cash in local currencies, effectively voiding the capital controls installed by the government.

People using money orders for money laundering purposes should be aware that all financial institutions report suspicious activity to the relevant tax authorities, and they will eventually catch up to you at some stage, with heavy penalties that could include fines and jail time.

Wrapping Up – Key Takeaways

Money orders are a financial instrument in the form of an issued certificate by a government-approved agency or financial institution.

You can purchase money orders from a variety of locations, including banks, grocery stores, and gas stations, making them the ideal way to send money for anyone with cash in hand.

Money orders do not have a practical use for purchasing goods and services – so, be wary of anyone trying to pay you with a money order.

International money orders are a fast and effective way of sending money overseas, but the sender should be wary of AML regulations stipulating how much money they can send in a year.

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Oliver Dale is Editor-in-Chief of MoneyCheck and founder of Kooc Media Ltd, A UK-Based Online Publishing company. A Technology Entrepreneur with over 15 years of professional experience in Investing and UK Business. His writing has been quoted by Nasdaq, Dow Jones, Investopedia, The New Yorker, Forbes, Techcrunch & More. He built Money Check to bring the highest level of education about personal finance to the general public with clear and unbiased reporting.


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