Demand Draft

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DEFINITION

A method used by individuals to make transfer payments from one bank account to another. Demand drafts are marketed as a relatively secure method for cashing checks. The major difference between demand drafts and normal checks is that demand drafts do not require a signature in order to be cashed.

Also known as "remotely created checks".

INVESTOPEDIA EXPLAINS

Demand drafts were originally designed to benefit legitimate telemarketers who needed to withdraw funds from customer checking accounts. However, the lack of a signature required to authorize the transfers have left demand drafts open to fraudulent use. The only information needed to create a demand draft is a bank account number and a bank routing number - this information is found on a standard check.

In 2005, the Federal Reserve proposed new regulations over the fraudulent use of demand drafts. The regulation increases a victim's ability to claim a refund and makes banks more accountable for cashing fraudulent checks.


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