What is a Drawee?
A drawee is a legal and banking term used to describe the party that has been directed by a depositor to pay a certain sum of money to the person presenting a check or draft written by the depositor.
A quintessential example of a drawee can be seen when cashing a paycheck. In this scenario, the bank that cashes the check acts as the drawee, the employer who issued the check is the drawer, and you are the payee.
Key Takeaways
-
A drawee is the person or entity that pays the holder of a check or draft. The holder of the check is the payee, and the check writer is the drawer.
-
Most often, if you deposit a check, your bank or check-cashing service is the drawee.
-
Payday loan shops that offer check-cashing services act as a drawee for customers but typically charge a fee for the service.
-
When coupons are used in retail transactions, such as in grocery stores, the retail outlet becomes the drawee.
How a Drawee Works
The drawee acts as an intermediary for financial transactions, redirecting funds from the payer’s (or drawer’s) account to the payee. Often, the drawee is a financial institution tasked with managing the payer’s funds within a deposit account. Consumer banks routinely execute this role, debiting funds from a depositor’s account to settle obligations on checks.
Check-cashing services also function as drawees but typically impose a small fee to facilitate transactions. Additionally, money order and wire transfer companies outside the traditional banking framework fulfill similar drawee roles, where the funds held by them are disbursed when the payee presents the proper documentation.
The drawer, on the other hand, is the individual or entity that authorizes the check or bill of exchange, instructing the drawee to release funds to the payee.
Drawees in Other Industries
Outside financial institutions, other parties can also informally serve as drawees. For instance, when a customer uses a manufacturer’s coupon, the retail store accepting the coupon can be viewed as a drawee. Here, the retailer facilitates the coupon transaction extended by the company that is the drawer or payer behind the coupon.
In such transactions, direct monetary exchange may not occur. Instead, the retailer applies a discount to the transaction amount without facing an actual out-of-pocket loss. They can later claim the funds supported by the coupon-issuing company. This scenario parallels financial institutions that cash checks by debiting the corresponding amounts from the drawer’s account.
What Are the 3 Parties in a Drawee Transaction?
A drawee transaction typically involves three parties: the drawer, the drawee, and the payee.
How Does a Payor Relate to a Drawee?
A payor, or drawer, is the individual who issues a check. The drawee, conversely, is the entity that honors the check, distributing funds to the presenting payee after verifying the legitimacy of the transaction.
What Happens When a Drawee Receives a Bill of Exchange?
A bill of exchange provides specific instructions to the drawee to disburse a stipulated amount to the presenting party. This type of transaction is commonplace in everyday banking, leading recipients to deposit checks with confidence that their accounts will reflect the credited funds corresponding to those checks.
The Bottom Line
A drawee is a pivotal element in financial transactions, facilitating the transfer of funds from a drawer to a payee. In its most recognizable form, a bank or financial institution acts as the drawee, guaranteeing the seamless execution of financial directives laid out by depositors.
Related Terms: Payee, Drawer, Bill of Exchange, Check, Money Order, Wire Transfer.
