Bank Draft Definition
A bank draft refers to a payment on a payer’s behalf which the issuing bank guarantees. Usually, banks would review the bank draft requester’s account to know if the funds available are sufficient for the check to get cleared. Upon confirmation that the funds available are sufficient, the bank effectively earmarks the funds from the individual’s account to be issued out by the time the bank draft is utilized. A draft guarantees the payee a secure and trusted payment method. And the bank account balance of the payer would be reduced by the amount withdrawn from the account.
A Little More on What is a Bank Draft
Getting a bank draft demands that the payer must have already deposited amounts equivalent to the check amount and also applicable fees with the issuing bank. A check is created by the bank to the payee drawn on the account of the bank. The payer’s name or remitter is stated on the check, however, the bank is the body making the payment. A bank officer or cashier appends the signature on the check. A bank draft is synonymous to a cashier’s check in terms of its functions.
Because a bank draws up and issues the money, a bank draft assures that the underlying funds would be available. Buyers or sellers request or make payments via bank drafts as a safe payment method.
Once a bank draft has been arranged, typically, it’s impossible to stop or cancel payment on it reason being that it, in effect, reflects a transaction which already occurred. But, in a situation where the draft gets stolen, destroyed, or even lost, it can be either replaced or canceled provided the purchaser possesses the required documentation.
Example of a Bank Draft
A seller can request a bank draft when there is no ongoing relationship with the buyer; a large scale price is involved in a transaction or the seller assumes there would be difficulty in payment collection. For instance, a seller will need a bank draft during the sale of an automobile or home. Obviously, a seller may not receive funds using a bank draft in a case where the bank is insolvent, doesn’t honor drafts that are outstanding, or if it’s a fraudulent draft.
A money order, as well as, a bank draft are both prepaid, having a stated and printed amount. Each one is considered a safe payment method from a third-party institution. When using a money order or bank draft, the payer doesn’t need to carry huge sums of money. But, a bank draft refers to a check that is drawn on the funds of a bank after the amount from the issuer’s account has been accepted, whereas cash is utilized when buying a money order. In this case, a money order is safer than a bank draft.
A bank draft may be issued only by a bank, while any certified institution, like a post office, bank, or a certified store, can issue a money order. Since, often times, money orders are utilized in money laundering, various governments place a limit on the amount of money that can be changed into a money order. For bank drafts, the amount can be higher. As a result of the limited amounts printed on money orders — as well as, the process banks undergo in the issuing of drafts — money orders are less costly than bank drafts. It is more difficult to obtain a bank draft than it is to obtain a money order because it is mandatory that the payer goes to his bank to buy the draft, instead of making use of a more institution which sells money orders.
References for Banker’s Draft
Academic Research on Banker’s Draft
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Methods of payment and foreign-exchange risk management among firms in Brunei Darussalam, Sirpal, R. (2009). The Journal of Risk Finance, 10(4), 377-392. –
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