What Is A Bank Draft?
A Bank draft, also known as a banker’s cheque, is a financial instrument purchased from the bank and used for remitting it at a later stage by the second party. In a given time, the second party can present this draft to any bank to withdraw the amount of money mentioned in the draft. It is a guarantee, which is available for the draft holder, that he will receive the specified amount on presenting the same.
A demand draft is very effective/popular in Asia and Britain. It is not very effective in the United States, but some banks do the financial guaranteeFinancial GuaranteeA financial guarantee is a promise undertaken by a third party to cover any financial obligation of another organization or individual, acting as a guarantor for any unpaid financial debts. If the concerned party is unavailable, authorities contact guarantors. work with their financial instruments, which are exercised there. Therefore, a bank draft form is very genuine and one of the safest ways to transfer a substantial amount for some big purchases.
Table of contents
How Does A Bank Draft Work?
A bank draft or banker’s cheque is popular for its authentication and no risk factor. Security measures are very vital here. No one can misuse this instrument because of its process.
However, the limitation of this process is that paying through a banker’s cheque is very time-consuming. It is not a liquid assetLiquid AssetLiquid Assets are the business assets that can be converted into cash within a short period, such as cash, marketable securities, and money market instruments. They are recorded on the asset side of the company's balance sheet., hence, it has some formalities, making it a little cumbersome. In the fast pace of life, we will lag if we wait for such delays. The biggest problem with this type of instrument is that it is very slow and costlier than cheques and online payments. Despite the guaranteed remittance, the banks can sometimes cancel the transaction because of some queries.
Therefore, online transactions are preferred. But for some significant financial transactions, some conservative or risk-averse individuals choose a banker’s cheque and are ready to incur bank draft fees.
Let us understand the different types of banker’s cheques and discuss why some individuals prefer incurring bank draft fees even in the internet era.
#1 – Money Orders
The specified amount is transferred from one place to another in this type. Banks also issue this on behalf of the customers. The money orders are sent from one place to another. It is also a financial instrumentFinancial InstrumentFinancial instruments are certain contracts or documents that act as financial assets such as debentures and bonds, receivables, cash deposits, bank balances, swaps, cap, futures, shares, bills of exchange, forwards, FRA or forward rate agreement, etc. to one organization and as a liability to another organization and are solely taken into use for trading purposes., and the bank takes the responsibility to remit the same on the presentation of the order before them.
#2 – Demand Draft
Demand drafts are one of the types of drafts. It is used where the payer and recipients are not in the same place. The money gets transferred into the receivers’ bank accounts upon depositing the draft. Many days today, financial transactions are going on through this method.
#3 – Certified Checks
Certified checksCertified ChecksA certified cheque is where the issuer bank guarantees on behalf of the account holder that they have an adequate amount of cash in the account to honour the recipient cheque. In addition, it verifies the authenticity of the account holder’s signature on the cheque. are a very typical type of banker’s check. The money is sent to the recipient’s bank account through the bank, and the bank charges some amount of commission from that. Therefore, it is one of the safest methods of money transfer.
Let us understand the concept better with the help of a couple of examples.
Shiny was about to purchase a sports car. After a lot of market research, she decided to buy a honda civic latest brand available. She then approached a dealer to know the prices and other formalities. The dealers asked for the draft of the said amount of the car. The dealers don’t want to risk the payment. Therefore, they had asked for the draft since the amount of risk involved in doing business through drafts is less than that of doing it through cheques. Therefore, the entire transaction was carried out through a demand draft. Shiny went to the bank, filled out a bank draft form for $7,000, and completed all the formalities with the dealers.
In February 2023, A state government in India welcomed demand drafts for event management companies to secure the tender for their Information and technology day.
This event was planned by the government of Rajasthan, the largest state in the country in terms of size. Their invitation for demand drafts instead of plain tenders was to ensure only genuine vendors would be able to apply.
Advantages & Disadvantages
Let us understand the advantages and disadvantages of securing a bank draft form and following a tedious procedure instead of using convenient forms such as electronic transfers through the discussion below.
- Usefulness: They are handy financial tools. It is straightforward and has a high value in the market to settle financial transactions.
- Beneficial for Large Transactions: This tool is generally used in the case of substantial transactions such as the purchase of a car, house, or any valuable items. They can be drawn for any amount of the sum involved, and it is a guaranteed payment tool. Thus, it helps the parties to benefit from large amounts of transactions.
- Risk: The risk involved in this type of banker’s cheque is negligible. That’s why large transactions can be confidently done by using this tool. The security measures are very well established for this type of tool compared to cheques or other means.
- Authenticity: It is a very authenticated tool. It is non-transferable without proper formalities. So any chance of forgery etc. has nothing to do with that. The bank issues the drafts with all the formalities, and the receiver has to present the draft before the bank remits the amount. The guaranteed payment option through this tool also adds to its authenticity.
- Little Expensive: The issuance of demand drafts is a bit expensive. The bank charges a specified amount over and above the amount to be transferred. Each bank has different charges, which are dependent upon the number of drafts to be made. On the other hand, it is convenient for the parties to sign cheques rather than visit a bank branch to issue the drafts.
- Time-Consuming: The process of bank drafts is time-consuming. The method of getting the draft is through banks only. The person should personally visit the bank branch to collect the draft. Also, the receiver has to present the draft to the bank for remittance. Therefore, nowadays, banks accept online transactions, which saves time and saves money.
- Deadline: There are deadlines to present the draft before the bank. If the drafts are somewhat older (2 weeks, for example), the bank refuses the remittance, and the refund process also takes time from the sender’s point of view. The deadlines for the drafts are very few as compared to the cheques. Therefore, nowadays, financial transactions are dealt with via cheques or online.
Bank Draft vs Certified Check
Bank drafts and certified cheques are often misunderstood by one another due to the closeness of their uses. However, there are key differences in their fundamentals and implications. Let us understand them through the discussion below.
- Bank drafts are issued by the individual or organization’s bank and is a form of guaranteed payment.
- It is issued by the bank at the request of the customer. Subsequently, it also transfers the amount to the destination account as per the instructions from the customer.
- The customer is not required to sign the bank draft form. However, the bank official’s sign and seal make it more secure.
- The bank charges a minimal bank draft fee for the services provided, which is considerably lower than other forms of transfer.
- Certified cheques are presented or issued by customers and is not a guaranteed form of payment.
- The bank official can check if the funds in the account are sufficient and transfer the amount accordingly.
- These cheques help businesses settle their payments with their suppliers or vendors.
- A certified cheque requires the customer’s signature. Additionally, even a bank official’s approval must be recorded on the cheque.
- The fee charges for these services are higher in comparison with a bank draft.
This has been a guide to what is bank draft. Here we explain its differences from certified checks and explore how it works with examples & types in detail. You can learn more about financing from the following articles –