Bank Draft Definition
A bank draft, also known as a demand draft or teller's check, is a payment instrument issued by a bank on behalf of a customer. It's essentially a check guaranteed by the bank, ensuring the recipient will receive payment.
How does a bank draft work?
- The customer requests a bank draft: The customer provides the bank with the amount they want to pay and the name of the payee (the person or entity receiving the payment).
- The bank issues the draft: The bank will deduct the amount from the customer's account and issue a check drawn on its own funds. This check is then payable to the payee.
- The payee presents the draft: The payee can present the bank draft to their own bank to deposit the funds or cash it at the issuing bank.
Why use a bank draft?
- Guaranteed payment: The bank's guarantee ensures the payee will receive the funds, providing a higher level of security compared to a personal check.
- Enhanced trust: Bank drafts can build trust in transactions, especially when dealing with parties unfamiliar to each other.
- Convenience: They offer a convenient way to make large payments, avoiding the need to send cash or a personal check.
Key features of a bank draft:
- Drawn on a bank's funds: This distinguishes it from a personal check, where the individual is responsible for the payment.
- Guaranteed by the bank: The bank guarantees payment, making it a secure and reliable form of payment.
- Payable to a specific party: Bank drafts are issued payable to a specific payee, ensuring funds are received by the intended recipient.
Difference between a bank draft and a check:
- Guarantor: A bank draft is guaranteed by the issuing bank, while a check is guaranteed by the individual writing the check.
- Funds: A bank draft is drawn on the bank's funds, while a check is drawn on the individual's account.
- Security: A bank draft offers greater security due to the bank's guarantee, making it a preferred option for high-value transactions.
Conclusion
Bank drafts provide a safe and secure way to make payments, especially for high-value transactions or when dealing with unfamiliar parties. They are guaranteed by the bank, offering peace of mind for both the payer and payee.