A bank draft, also referred to as a bank cheque or cashier’s cheque in some countries, is a type of cheque that guarantees payment by the bank, which issues the draft.
The term “cashier’s cheque” is sometimes used instead of bank draft, especially in the United States.
A bank draft is typically used in any transaction where the buyer or seller wishes to guarantee payment of funds. Bank drafts are also frequently used in international transactions.
A bank draft is obtained by a buyer, from his own bank, either by handing over cash or by having the bank deduct the amount of the draft from the buyer’s account.
It is this fact that makes it difficult to cancel or stop payment on a bank draft, since the buyer has already paid out the funds that the draft represents, according to www.thebalance.com.
There is typically a fee charged by the bank for a draft, which is not a personal or business cheque from the buyer’s current account, but a cheque issued by the bank itself.
According to www.investopedia.com, a bank draft is a cheque drawn on a bank’s funds and is guaranteed by the bank that issues it.
According to experts, here are some benefits of a bank draft:
- Bank guarantees payment
Banks are able to guarantee bank drafts because the customer has already “paid.” To get a banker’s draft, a bank customer must have funds (or cash) available, and the bank will freeze or keep those funds in its own account until the payment is completed. If somebody pays you with a bank draft, you can’t always assume you’ll get the money. Scammers regularly use fake cashier’s cheques to swindle victims. You may believe you’re getting paid with cleared funds, but you should always check with your bank and verify that the cheque is legitimate before you spend the money or sell something valuable.
- Good for large transactions
For high-naira transactions, the consequences of a returned (or bounced) cheque is significant. It’s risky to send expensive goods or complete a deal when there’s any uncertainty about a successful payment. A bank draft is a guaranteed form of payment that makes the payment much more likely to go through.
- Safety of transactions
A bank draft is a form of payment used when safety is important. Similar to a cashier’s cheque, a bank draft is safer than a personal cheque when accepting payments.
- It is fast
Standard cheques can take several business days to move through the banking system. Receiving a cheque doesn’t mean you actually receive funds (and can withdraw the funds). Bank drafts will generally be available in the recipient’s account within one business day, and it’s unlikely that the bank will reverse the deposit a few days or weeks later.
Understanding features of a bank draft
It is helpful to compare and contrast with regular personal and business cheques in order to understand the features of a bank draft, according to www.thebalance.com.
When a person or business writes a cheque, they don’t necessarily need the money available in their account; they can write a cheque for whatever they want and the recipient cannot be sure if the cheque will bounce or not. Of course, there are consequences for passing bad cheques, but it happens. Sometimes honest mistakes are to blame, and nobody’s trying to get away with anything (it’s easy to forget about other transactions that drain an account).
With a bank draft, the funds are moved into the bank’s accounts once the draft is issued. In other words, the person or organisation paying with a bank draft can’t even get a draft unless they have the funds required, and they can’t spend that money before you deposit the bank draft, because the bank already took the money out of their account.
Instead of relying on everybody who writes a cheque, you’re relying on a bank (which presumably has significant assets and strict procedures in place) to back up the payment. If the bank goes out of business, you won’t get paid, but that risk is fairly small.
To deposit or cash a bank draft, treat it as if it was any other cheque. Take it to your bank and endorse the back of the document. Your bank will credit the funds to your account more quickly.
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