What is the Bank Draft?

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. So it is very genuine and one of the safest ways to transfer a substantial amount for some big purchases.

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Types of Bank Draft

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

#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.read more, 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 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 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.

Examples of Bank Draft

Example #1

Shiny was about to purchase a sports car for herself. 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, bought a demand draft of $7,000 approx, and completed all the formalities with the dealers.

Example #2

My Roy went to enroll himself in a banking course in Toronto. The institute asked him to pay the fees via demand drafts when he requested to pay the fees via cheque. The institute’s management 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 and has a high value in the market to settle financial transactions.Beneficial for Large Transaction: 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.

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 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.

Conclusion

The banker’s cheque is popular for its authentication and no risk factor. 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 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.read more, so it has some formalities, making it a little cumbersome. In this 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, nowadays, online transactions are prevalent. But for some significant financial transactions, some conservative or risk-averse individuals choose a banker’s cheque as one of their best options.

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

  • What is Commercial Bank?What are Credit Terms?Examples of BookkeepingBad BankImplied Warranty