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What Is A Bank Draft?
A bank draft, also known as a banker’s draft or a cashier’s check, is a financial instrument issued by a bank on behalf of a customer. It serves as a secure method of payment, especially in situations where the payee requires a guaranteed form of payment. Bank drafts are commonly used for large transactions, real estate transactions, or in situations where the payee may not accept personal checks due to concerns about the check bouncing. While bank drafts offer security, it’s essential to be cautious about potential fraud, as forged or counterfeit drafts can pose risks. Verifying the authenticity of the bank draft with the issuing bank is advisable before accepting it as payment.
How a Bank Draft Works
Here’s how a bank draft works:
- A bank draft is typically issued at the request of a customer. The customer provides the bank with the details of the payee (recipient), the amount to be paid, and any other necessary information.
- Funds Deduction:
- When the bank issues a draft, it deducts the specified amount from the customer’s account and holds those funds to guarantee payment.
- Secured Payment:
- The bank draft is considered a secure form of payment because the funds are already set aside by the bank. It’s similar to having a prepaid check, ensuring that the payee will receive the specified amount.
- Payee Details:
- The bank draft includes the name of the payee, making it payable only to the person or entity specified. This adds an extra layer of security compared to regular checks.
- Guaranteed Funds:
- Unlike personal checks, which can bounce if there are insufficient funds in the account, a bank draft is guaranteed by the bank. This makes it a preferred method of payment in transactions where certainty is crucial.
- Cross-Border Transactions:
- Bank drafts are often used for international transactions, providing a secure way to make payments in foreign currencies.
- No Stop Payments:
- Once a bank draft is issued, it is difficult to stop or cancel. This makes it a reliable form of payment, but customers should ensure accuracy in the details before requesting a draft.
How to Cancel a Bank Draft
Certain banks might not implement stop payments on issued drafts due to the completed transaction recorded in their system. If you intend to reverse the transaction, the standard procedure often involves redeeming the draft for the entire amount. However, in specific instances, you may be able to cancel or replace a draft that is lost, stolen, or damaged, provided you furnish the necessary documentation.
Bank Drafts vs. Money Orders
Bank drafts and money orders are both financial instruments used for making secure payments, but they have some key differences. A bank draft is issued by a bank on behalf of an account holder, ensuring that the funds are guaranteed. It is often used for larger transactions and is considered a more secure form of payment.
On the other hand, a money order is a prepaid payment instrument purchased from various outlets like post offices or grocery stores. Money orders are useful for smaller transactions, and the funds are already paid for when the money order is bought. While both provide a secure means of payment, bank drafts are typically associated with bank accounts and larger sums, while money orders offer a convenient option for smaller transactions without the need for a bank account.
Bank Draft Example: Suppose you are buying a used car from someone you don’t know well, and they prefer a more secure form of payment than a personal check. In this case, you go to your bank and request a bank draft for the agreed-upon amount. The bank issues a draft, guaranteeing the funds, and you provide it to the seller. The seller can then deposit or cash the bank draft, knowing that the payment is secure.
Money Order Example: Now, imagine you are renting an apartment and your landlord only accepts payments by check or money order. You go to a local grocery store, purchase a money order for the monthly rent amount, and provide it to your landlord. The money order is a prepaid instrument, meaning you already paid the grocery store the specified amount when you bought it. The landlord can then deposit or cash the money order.
What Is the Difference Between a Bank Draft and a Certified Check?
A bank draft is issued by a bank on behalf of an account holder, guaranteeing payment and drawing funds directly from the account for transactions like large purchases or international payments. On the other hand, a certified check is initiated by the account holder, with the bank certifying that there are sufficient funds to cover it. Both provide security to the payee, making them preferred for situations where guaranteed payment is essential, but they differ in their initiation and specific use cases.