Bank Draft

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DEFINITION of 'Bank Draft'

A bank draft is a payment on behalf of a payer that is guaranteed by the issuing bank. Typically, banks will review the bank draft requester's account to see if sufficient funds are available for the check to clear. Once it has been confirmed that sufficient funds are available, the bank effectively sets aside the funds from the person's account to be given out when the bank draft is used. A draft ensures the payee a secure form of payment. And the payer's bank account balance will be decreased by the money withdrawn from the account.

BREAKING DOWN 'Bank Draft'

Obtaining a bank draft requires that the payer has already deposited funds equal to the check amount and applicable fees with the issuing bank. The bank creates a check to the payee drawn on the bank’s own account. The name of the payer (also known as the remitter) is noted on the check, but the bank is the entity making the payment. A bank cashier or officer signs the check. A bank draft functions similarly to a cashier's check

Because the money is drawn upon and issued by a bank, a bank draft guarantees the availability of the underlying funds. Buyers or sellers make or require payments through bank drafts as a secure method of payment.

Once a bank draft is arranged, it is usually not possible to cancel or stop payment on it since it, in effect, represents a transaction that has already occurred. However, if the draft has been lost, stolen or destroyed, it can usually be canceled or replaced as long as the purchaser has the required documentation.

Bank Draft Examples

A bank draft can be required by a seller when the seller has no relationship with the buyer; a transaction involves a large sale price; or the seller believes collecting payment may be difficult. For example, a seller will require a bank draft when selling a home or automobile. Of course, a seller might not collect funds with a bank draft if the bank becomes insolvent and does not honor outstanding drafts, or if the draft is fraudulent. 

Bank Draft and Money Order: Similarities and Differences

A bank draft and a money order are both prepaid, with a specified and printed amount. Each is considered a secure method of payment from a third-party institution. The payer does not need to carry large amounts of money when using a bank draft or money order. However, a bank draft is a check drawn on a bank’s funds after accepting the amount from the issuer’s account, whereas cash is used when purchasing a money order. For this reason, a money order is more secure than a bank draft.

Only a bank may issue a bank draft, while any approved institution, such as a certified store, post office or bank, can issue a money order. Since money orders are often used in money laundering, many governments limit how much money can be converted into a money order. Bank draft amounts can be much higher. Due to the limited amounts printed on money orders – and the process banks go through when issuing drafts – money orders cost less than bank drafts. Obtaining a bank draft is more difficult than obtaining a money order because the payer must go to his bank to purchase the draft, rather than using one of the more accessible institutions that sell money orders.