Bank Draft

A bank draft, bank cheque or banker’s draft is a cheque that a bank issues to a customer that has been drawn by the bank. This is a transaction initiated by the bank as the recipient has already paid the amount and the charges involved. The bank draft carries the beneficiary’s name (the person who receives the amount). A bank draft means that the money has already been withdrawn by the bank. In other words, there is no possibility the cheque will bounce; this is not possible with personal cheques.

Bank Draft Meaning

A bank draft is a negotiable instrument that functions like a cheque in terms of payment. The complete amount of the draft is normally pulled from the requesting payer’s account and stored in a general ledger account until the beneficiary pays the draft. Bank drafts offer a safe and secure method of payment to the beneficiary.

How does it work?

Consumers have numerous options for safe, approved payment alternatives. For example, they may ask for a deposit to secure an apartment or a down payment on a significant purchase. Certified payment solutions provide peace of mind to the payee by ensuring that the funds are accessible. Certified cheques, electronic payments and bank drafts are some alternatives available. They are safe payment choices that the issuing bank guarantees in many situations, for a considerable sum of money. When a customer requests a bank draft, the representative double-checks that the consumer has sufficient funds in their account to cover the required amount. The bank then withdraws the money from the user’s account and transfers it to accounting records or internal accounts after being validated.

 The beneficiary’s name and the amount are written on the draft by the bank. The draft contains a serial number to identify the customer, watermarks and maybe micro-encoding, which identifies it as a legal, financial asset that can be negotiated by the payee when submitted to their bank. The issuing bank becomes the payer because the amounts have already been removed from the requesting customer’s account. Customers usually pay a fee for drafts at their bank. This implies that, in addition to the draft money, the client may be charged a fee—typically a fixed amount, a flat fee depending on the total sum of the draft, or a percentage of the draft value. 

Types of Bank Draft

Money Order

This involves the transfer of a defined quantity from one location to another. This is also issued on behalf of clients by banks. For example, money orders are delivered from one location to another. It is also a financial tool, and the bank assumes responsibility for remitting the funds upon receipt of the order.

Certified Cheques

A common type of banker’s cheque is a certified cheque. The money is transmitted through the bank to the recipient’s bank account, deducting a commission. It is one of the most secure ways to send money.

Demand Draft

When the payer and the receiver are not in the same location, this method is employed. Upon depositing the draft, the money is transferred into the receiver’s account. Today, this strategy is used for a large number of financial transactions.

Benefits of Bank draft

Cross-border transaction

Bank drafts are often utilised for cross-border transactions and investments in other nations since they may supply cash in almost any currency.

Certainty of funds

A bank draft is a form of transaction guaranteed by the bank. It implies that the payee may count on cash being available. It is safer than personal cheques, which may bounce if the payer’s account is insufficiently funded.

Ease and convenience

One of the benefits that make bank drafts a more suitable means of transaction is ease and convenience. Sending a significant quantity of money is easier and more convenient than withdrawing a large sum of cash. In addition, a bank draft, unlike an e-transfer, has no maximum amount limit and does not require the payee’s banking details. As a result, bank drafts are routinely utilised for large expenditures like buying a house or a car.

Authenticity

It is a reliable tool and is not transferable without the correct paperwork. The bank provides the drafts with all the necessary formalities, and the recipient only has to produce the draft to the bank for the money to be transferred. This offers a guaranteed payout option that adds to its legitimacy.

Characteristics

• It is similar to other negotiable instruments, having a payment order.

• A bank draft is a document that one bank’s office drafts on another bank’s office. A bank may also draw it on another bank.

• Anyone can get a bank draft by depositing a sum of money in the bank. The bank will issue the draft to the individual involved upon the receipt of the amount.

• A bank draft payment is certain.

Conclusion

A bank draft is one of the common means of payment transactions being used throughout the world. More than convenience, it is known as a secure form. Individuals can use bank drafts to make payments to other parties as they are insured by financial institutions.