What is a Demand Draft?
A demand draft is a secure way to transfer money from one bank account to another without the need for a signature, unlike checks. Although demand drafts provide an additional layer of security, they have been susceptible to fraud, leading to regulations for victims to recoup their money and hold banks accountable.
Key Takeaways
- Demand drafts facilitate bank transfers without needing a signature.
- They are prepaid instruments, so payments can’t be stopped once issued.
- Fraud protection measures now exist to refund victims from the bank holding the demand draft.
- Though less versatile than other payment methods, demand drafts offer more security compared to electronic systems for high-valued transactions.
- Contact your bank immediately if a demand draft is lost or stolen.
Understanding Demand Drafts
When a bank prepares a demand draft, the requested amount is taken from the account of the person whose draft it is and transferred to their receiving account at another bank. The person requesting the draft is the drawer, the bank issuing the draft is the drawee, and the person receiving the payment is the payee.
Example: Imagine a small business owner needing to purchase items on credit. They request their bank to send a demand draft to the supplier for the owed amount. The business owner becomes the drawer, the bank becomes the drawee, and the supplier becomes the payee. Since the draft is prepaid, payment cannot be canceled unlike a check.
Process of Obtaining a Demand Draft
- Choose the Bank: Visit the issuing bank or financial institution for the draft.
- Fill Out Application: Provide necessary details like the amount and the payee’s name.
- Provide Identification: Submit proof of ID and address according to KYC regulations.
- Payment: Pay the issuance fee.
- Verify Info: Ensure all details on the demand draft are correct before delivering it to the payee.
Demand Drafts vs. Other Payment Methods
Demand Drafts vs. Checks
- Issuer: A demand draft is issued by a bank, while a check is issued by an individual.
- Signature Requirement: Demand drafts do not require a signature, whereas checks do.
- Stop Payment: Unlike checks, payment of a demand draft cannot be stopped by the drawer.
Demand Drafts vs. Wire Transfer
- Physical vs. Electronic: Demand drafts are physical and guaranteed; wire transfers are electronic and faster.
- Fees: Both may incur fees, but wire transfer fees can vary for domestic and international transfers.
Demand Drafts vs. Online Payment System
- Speed: Online systems offer real-time transactions compared to the several days required for a demand draft to clear.
- Cost-effectiveness: Online systems might provide free transactions under specific conditions.
Frequently Asked Questions
How Long Does It Take for a Demand Draft to Clear?
Typically, several business days are required for a demand draft to clear, depending on the banks and presentation method involved.
What Fees and Charges Are Associated with Demand Drafts?
You might incur an issuance fee and potentially additional charges for courier services. Check with your bank for specific fees.
Can I Cancel or Stop a Demand Draft?
Generally, yes. Contact the issuing bank immediately and follow their specific process, which may include submitting a written request and possibly a cancellation fee.
What Should I Do If My Demand Draft Is Lost or Stolen?
First, notify the issuing bank and provide all relevant details. You will need to follow the bank’s process, possibly providing written documentation for an investigation.
The Bottom Line
Demand drafts are secure bank-issued payment instruments ensuring guaranteed funds transfer to the payee. They offer considerable security benefits, ease of usage, and wide acceptance for high-value transactions. Obtain a demand draft by completing an application, submitting necessary documentation, and paying associated fees.
Related Terms: check, wire transfer, online payment system, Know Your Customer (KYC).
References
- Board of Governors of the Federal Reserve System. “Collection of Checks and Other Items By Federal Reserve Banks and Funds Transfers Through Fedwire and Availability of Funds and Collection of Checks”, pages 1-18.
