A bank draft is a payment instrument that is similar to a check but offers greater security and reliability. It is a guaranteed payment method issued by a bank on behalf of the payer. It is a written order from the bank to pay a specific amount of money to a designated payee.
How Does Bank Draft Payment Work?
- The payer applies for a bank draft at their bank. This involves providing the bank with the name of the payee, the amount to be paid, and other relevant details.
- The bank verifies the payer's account balance and deducts the draft amount from their account.
- The bank issues a bank draft in the payee's name. This draft will be payable on demand at the bank's branch or any of its correspondent banks.
- The payer delivers the bank draft to the payee. The payee can then deposit the draft into their account or present it for cash payment at the issuing bank.
Advantages of Bank Draft Payment
- Guaranteed Payment: A bank draft is a guaranteed payment instrument because the funds are already held by the bank. This means the payee is assured of receiving payment, unlike with a regular check where there is a risk of insufficient funds.
- Security: Bank drafts are highly secure because they are issued by a financial institution and have a unique serial number. This makes them difficult to counterfeit or forge.
- Convenience: Bank drafts can be used for a variety of purposes, such as paying for large purchases, making payments to foreign suppliers, or settling debts.
- International Transactions: Bank drafts are commonly used for international transactions because they are accepted by banks worldwide.
Disadvantages of Bank Draft Payment
- Cost: Issuing a bank draft typically incurs a fee, which can vary depending on the bank and the amount of the draft.
- Processing Time: It may take a few days for the bank to process and issue a bank draft.
- Availability: Not all banks offer bank draft services, and the process may be more complicated for international transactions.
When to Use Bank Draft Payment
Bank drafts are a suitable option for making payments when:
- Security and guaranteed payment are paramount.
- The payer is concerned about the risk of non-payment.
- A payment instrument that is accepted internationally is required.
- A payment is being made for a large or significant amount.
While bank drafts have been a popular method for decades, it is important to note that electronic payment methods, such as wire transfers, are becoming increasingly common.