What is a Bank Draft?
A bank draft, also called a bank check, is a method of payment that involves a document issued by a bank guaranteeing that the amount stated on the certificate will be paid to the recipient of the document. A bank draft is used as a type of check which is more reliable than a personal check as it is backed by the bank itself on behalf of the payer; hence, it ensures that the person who the draft is addressed to, will receive the money.
A bank draft is a check that is drawn on a bank’s funds and guaranteed by the bank that issues it.
Similar to a cashier’s check, a legitimate bank draft is safer than a personal check when accepting large payments. To get a banker’s draft, a bank customer must have funds (or cash) available. The bank will freeze the amount needed or move those funds into the bank’s accounts to complete the payment.
The term bank draft is used for other situations, and use varies from country to country. For example, electronic bill payments that move funds directly from a bank account to a service provider (such as an electric utility provider or an online merchant) are also called drafts.
How a Bank Draft Works
Consumers have several avenues available when they need secure, certified payment options. They may require them to secure an apartment or for a deposit for a very large purchase. Certified payment options give the payee security, knowing that the funds are available. These options include certified checks, wire transfers, and bank drafts.
Bank drafts — also called banker’s drafts, bank check, or teller’s check — are just like cashier’s checks. They are secure payment options that are guaranteed by the issuing bank— in many cases, for a large amount of money. When a customer requests a bank draft, the representative ensures they have enough money in their account to cover the amount requested. Once verified, the bank withdraws the funds from the customer’s account and transfers it to a general ledger or internal account. The bank prepares the draft with the payee’s name and the amount. The draft has a serial number — which identifies the remitting customer — watermarks, and may even have micro-encoding — identifying it as a legitimate financial instrument that can be negotiated when presented by the payee to their bank. Since the funds are already withdrawn from the requesting customer’s account, the issuing bank ultimately becomes the payer.
As mentioned above, bank drafts act as a viable and secure form of payment. They may be required by a seller when they have no relationship with a buyer, when a transaction involves a large sale price, or if the seller believes collecting payment may be difficult. For example, a seller may request a bank draft when selling a home or an automobile. Of course, a seller may not collect funds with a bank draft if the bank becomes insolvent and does not honor outstanding drafts, or if the draft is fraudulent.
Banks normally charge customers for drafts. This means that in addition to the amount of the draft, the requesting customer may be liable for a fee — usually a flat rate, a flat fee based on the total amount of the draft, or for a percentage of the draft. Banks may waive the fee for customers who have a good relationship with the institution or for those who are considered high-net-worth individuals (HNWIs).
Basic Bank Drafts
A traditional bank draft is a useful tool when safety is paramount.
Large amounts: For high-dollar transactions, the consequences of a returned or bounced check are significant. It’s risky to send expensive goods or complete a deal when you’re not certain about getting paid. A legitimate bank draft is a guaranteed form of payment that makes the payment much more likely to be successful.
Available funds: Personal and business checks can take several business days to move through the banking system and appear in your account. Receiving a check doesn’t mean you’ll actually receive funds or that you can withdraw the funds immediately.
Bank drafts are typically available for spending in the recipient’s account within one business day, and it’s unlikely that the bank can reverse the deposit a few days or weeks later. As a result, bank drafts are popular for things like international trade or purchasing a home.
The term “cashier’s check” is sometimes used instead of bank draft, especially in the United States. A cashier’s check is similar to a bank draft: It’s a check that a bank prints and guarantees — after the bank receives money from the drawer (the person who wants to make a payment). Banks can guarantee bank drafts because the customer has already “paid.”