What Is a Demand Draft?

A demand draft is a method used by an individual for making a transfer payment from one bank account to another. Demand drafts differ from normal checks in that they do not require signatures to be cashed and were originally designed to benefit legitimate telemarketers who needed to withdraw funds from customer checking accounts using their bank account numbers and bank routing numbers.

In 2005, due to the increasing fraudulent use of demand drafts, the Federal Reserve proposed new regulations increasing a victim's right to claim a refund and holding banks more accountable for cashing fraudulent checks.

Understanding Demand Draft

When a bank prepares a demand draft, the amount of the draft is taken from the account of the customer requesting the draft and is transferred to an account at another bank. The drawer is the person requesting the demand draft; the bank paying the money is the drawee; the party receiving the money is the payee.

For example, a small business owner purchases products from another company on credit. The small business owner asks his bank to send a demand draft to the company for payment of the products, making him the drawer. The bank issues the draft, making it the drawee. After the draft matures, the owner of the other company brings the demand draft to his bank and collects his payment, making him the payee.

Demand Draft Versus Check

A demand draft is issued by a bank, while a check is issued by an individual. Also, a demand draft is drawn by an employee of a bank, while a check is drawn by a customer of a bank. Payment of a demand draft may not be stopped by the drawer as it may with a check.

[Important: Because a demand draft is a prepaid instrument, payment cannot be stopped, while payment of a check may be denied for insufficient funds.]

Additionally, a demand draft cannot be hand-delivered like a check. It may be drawn regardless of whether an individual holds an account at the bank, while a check may be written only by an account holder.

An Example of a Demand Draft

For five days in July 2016, the fourth series of the Sovereign Gold Bond Scheme (SBS) in India let investors purchase gold bonds with 2.75% interest, payable semiannually. Individuals, Hindu undivided families, trusts, nonprofit organizations, and universities were able to purchase a minimum subscription of 1 gram and a maximum of 500 grams per investor. Payment was to be made with cash, demand draft, check or electronic banking.

Key Takeaways

  • A demand draft is a method used by an individual for making a transfer payment from one bank account to another.
  • Demand drafts do not require a signature to cash.
  • A demand draft is a prepaid instrument so you cannot stop payment on it.