Bank Draft

What is the Bank Draft?

A Bank draft, also known as banker’s cheque, is a financial instrument which is purchased from the bank and is used for remitting it in a later stage by the second party. The second party, in a given time, can present this draft in any bank to withdraw the amount of money mentioned in the draft. It is a guarantee, which is available for the draft holder that on presenting the same he will receive the specified amount.

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.read more work with their financial instruments, which are exercised there. It is very genuine and one of the safest ways to transfer a substantial amount for some big purchases also.

Bank-Draft

You are free to use this image on your website, templates etc, Please provide us with an attribution linkHow to Provide Attribution?Article Link to be Hyperlinked
For eg:
Source: Bank Draft (wallstreetmojo.com)

Types of Bank Draft

Now we’re discussing various kinds that are as follows:

Types-of-bank-draft

You are free to use this image on your website, templates etc, Please provide us with an attribution linkHow to Provide Attribution?Article Link to be Hyperlinked
For eg:
Source: Bank Draft (wallstreetmojo.com)

#1 – Money Orders

In this type, where the specified amount is being transferred from one place to another. Banks also issue this on behalf of the customers. The money orders are sent from one place to another. It is also a financial instrument, 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 at the same place. The money gets transferred into the bank accounts of the receivers on 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.read more are a very typical type of banker’s cheque. The money is sent to the recipient’s bank account through the bank, and the bank charges some amount of commission from that. It is one of the safest methods of money transfer.

Examples of Bank Draft

Example #1

Shiny was about to purchase a sports car for herself. After a lot of market research, she decides to buy a honda civic latest brand, which was 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 very much less than that of doing it through cheques. Therefore the entire transaction was carried out through a demand draft. Shiny went to the bank and bought a demand draft of $7,000 approx and completed all the formalities with the dealers.

Example #2

My Roy went to enroll himself for a banking course in Toronto. The institute asked him to pay the fees via demand drafts when he has requested to pay the fees via cheque. The management of the institute refused his request by asking for the demand draft or certified check.

Advantages

Some of the advantages are as follows.

  • Usefulness: They are handy financial tools. It is straightforward to use and has a high value in the market to settle financial transactions.
  • Beneficial for Large Transaction: This tool is generally used in 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 avail of the benefit of 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 as 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 just present the draft before the bank to remit the amount. The guaranteed payment option through this type of tool also adds to its authenticity.

Disadvantages

Some of the disadvantages are as follows.

  • 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 is dependent upon the number of drafts that are to be made. On the other hand, it is somewhat convenient for the parties to sign cheques rather than visiting 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 not only save time but also save 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 of the drafts are very less as compared to the cheques. Therefore, nowadays, the financial transactions are dealt with via cheques or online methods.

Conclusion

For its authentication and no risk factor, the banker’s cheque is popular. The security measures are very vital here. No one can misuse this instrument because of its process.

But the limitation of this process is that the process of paying through 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.read more, so it has some formalities, which make it a little bit cumbersome. In this fast pace of life, if we will wait for such delays, we will lag. The biggest problem with this type of instrument is that it very slow, and it is costlier than cheques and online payments. Despite the guaranteed remittance, the banks can sometimes cancel the transaction because of some queries.

Therefore, nowadays, online transactions are prevalent. But for some significant financial transactions, some conservative or risk-averse individuals choose banker’s cheque as one of their best options.

Recommended Articles

This has been a guide to what is bank draft and its meaning. Here we discuss types and examples of banker’s cheque along with advantages and disadvantages. You can learn more about financing from the following articles –