Bank Drafts: Definition, Process & Benefits
The salesman then bought himself a new car with the Cashier’s Check, something he could not have done if the check was certified. The fee is very low compared to wire transfer since I only pay a small amount (5 percent of amount, capped at $10). And I could ask for any foreign currencies that the recipient would like to receive in (or according to his bank account currency).
Can be used for cross-border purchases and investments
Might as well use carrier pigeons, it would probably get there faster than an international bank draft. Since bank drafts represent a transaction that has already taken place, it cannot be canceled once it is delivered to the payee. If the bank draft gets destroyed or stolen before being delivered to the payee, the buyer can go to their bank to get a new draft and cancel the existing one. Similarly, if the transaction gets canceled for any reason, the buyer can request the bank to cancel the draft unless it has already been cashed out by the payee.
- A bank draft is typically used when making a significant purchase.
- Given they are pre-funded, bank drafts are less likely to bounce compared to regular checks.
- The robust security features of bank drafts do not render them immune to loss or theft, but financial institutions have protocols in place to address such situations.
- This type of draft is most often used to pay for utilities, mortgage, insurance, and other important bills.
- Banks usually charge for drafts, which can be a flat fee or a percentage of the draft amount.
Common Use Cases for Bank Drafts
Only a bank may issue a bank draft, while an approved institution, such as a certified store, post office, or bank, can issue a money order. Since money orders are often used in money laundering, many governments limit how much money can be converted into a money order. Due to the limited amounts printed on money orders— and the process banks go through when issuing drafts—money orders cost less than bank drafts. A bank draft is a payment instrument issued by a bank that guarantees funds from the bank’s own account, ensuring that the payee receives a secure and verified payment. If the individual has sufficient funds, the bank approves the request, withdraws funds from the individual’s account, and issues a bank draft for an equivalent amount. The funds withdrawn from the individual’s account are generally transferred to the bank’s reserve account until the draft is presented for payment by the beneficiary.
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They might be on vacation, sick or whatever and if we cancel them and they come back, they are going to be mad because they cannot work out since we have canceled them for lack of activity. Lots of customers come in and go, out for a short while or a long time, we do not know. And lastly, this sort of overseas transfer via bank drafts are meant for non urgent payments, considering the time it may take for the drafts to reach the recipient.
They also provide advice and assistance to customers regarding the appropriate use of bank drafts for various transactions. The trust placed bank draft definition in these institutions is fundamental to the effectiveness of bank drafts as a payment method. Bank drafts are a staple in the financial toolkit, offering a secure method of payment that is widely accepted and trusted.
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The recipient then receives notification by mail that they may collect the funds from their respective branch office once their identification has been validated. If you change your mind and decide not to make the purchase or if the seller cancels the sale, you can get a refund on your bank draft. All you need to do is bring both parts of the draft to your financial institution.
Banks and Financial Institutions’ Role
Some banks may permit you to cancel drafts under extraordinary circumstances, but these policies are strict — and rare. Usually, this option is reserved for confirmed fraud cases, and even then it’s difficult to cancel the check once it’s been made and sent. Consumers and business owners can also send money using an alternative to drafts, such as a certified check, cashier’s check, or money order. But the following methods may be an even more convenient way to send money quickly and securely.
Issuance Process
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. Bank drafts are a secure and reliable method of transferring large sums of money.
Understanding Bank Draft Fees
- Certified payment options give the payee more security because the funds are guaranteed.
- The bank draft is then issued by the credit account and sent to the recipient.
- During this time, the banks communicate through established interbank networks to ensure the draft is honored.
- Note that the amount will remain blocked on the buyer’s account until the draft has been cashed.
- Some banks don’t allow stop payments on drafts because, in their records, the transaction is complete.
- The bank creates a check to the payee drawn on the bank’s own account.
Once the payee presents the bank draft for payment, his or her identity is verified with the name on the bank draft. After the identity verification process, the funds are deposited into the payee’s account. The funds can take anywhere between 1-4 business days to process. A normal cheque represents an instruction to transfer a sum of money from the drawer’s account to the payee’s account. Any individual or company’s operating a current account (or checking account) has authority to draw cheques against the funds stored in that account.
Benefits of Using Bank Drafts
As a result, the recipient can have peace of mind, knowing that the payment is guaranteed, and the risk of bounced payments is completely avoided. This makes bank drafts an attractive option in situations where certainty and reliability are essential. The distinction between bank drafts and personal checks is a fundamental concept in financial transactions, with each serving unique purposes and offering different levels of security and trust. Personal checks are written and signed by an individual from their personal bank account, indicating to their bank that a specified amount of money should be paid to a named individual or entity. Cashier’s checks, also known as bank checks or official checks, are bank drafts issued by a bank and drawn on its own funds rather than the funds of a personal account. When a customer requests a cashier’s check, the bank debits the customer’s account for the amount of the check and assumes the responsibility for covering the check upon presentation.
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These benefits make bank drafts a better form of payment than simply a check or money order, and they even give some flexibility in terms of purchase price and currency type. A draft is often more secure than keeping a large sum on hand after a customer makes a big purchase. Additionally, bank drafts can be issued in a variety of foreign currencies, which makes bank drafts an excellent option for international transactions. Money orders are different from bank drafts since they don’t need to be sent from a bank. While most financial institutions offer money orders, you can purchase a money order from third parties like post offices or retailers. Bank drafts, also known as banker’s drafts, bank checks, or teller’s checks, are guaranteed by the bank and often used for large transactions.