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  • Writer's picturePeak Frameworks Team

What is a Bank Draft and How Does It Work?

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What is a Bank Draft?

A bank draft, sometimes referred to as a banker's cheque, is a payment instrument issued by a bank on behalf of the payer.

Unlike regular checks, which can bounce if the payer's account has insufficient funds, bank drafts are pre-funded and thus guarantee the amount to the payee.

Bank Drafts
Source: moneyGenius

How Does a Bank Draft Work?

The process is relatively straightforward:

  • The payer approaches their bank, requesting a bank draft.

  • They provide the necessary funds for the draft (or the bank verifies they have sufficient funds in their account).

  • The bank then issues the draft to the payee on behalf of the payer.

  • It's essential to differentiate between bank drafts and other payment methods. Unlike money orders, which anyone can buy from various locations, bank drafts are exclusive to banks and often cater to more significant sums.

Advantages of Using Bank Drafts

Bank Drafts Advantages
Source: WallStreetMojo

Security

Given they are pre-funded, bank drafts are less likely to bounce compared to regular checks. This factor is particularly beneficial for large transactions, where the risk is higher.

Universality

They are widely accepted, especially in international business transactions. For European companies expanding their operations into North America, the bank draft offers a familiar and trusted payment method.

Speed and Efficiency

Unlike wire transfers, which sometimes take days to process, bank drafts provide a quicker alternative.

If you're diving into the world of high-stakes investment or just looking for a safer way to conduct business, understanding tools like bank drafts is crucial.

Potential Drawbacks and Limitations

No financial tool is without its challenges. For bank drafts, these include:

Costs

Obtaining a bank draft usually comes with fees, which might make them less appealing for smaller transactions.

Modifications

Once issued, it's challenging to modify or cancel a bank draft.

Preference for Electronic Transfers

In certain industries, especially tech-centric ones, electronic transfers might be the go-to, making bank drafts seem outdated.

Common Scams and How to Avoid Them

Common Scams
Source: Forbes

Scammers have often used counterfeit bank drafts in fraud schemes. A typical example involves selling a product online, where the scammer sends a counterfeit bank draft for more than the product's price, asking the seller to refund the difference. To avoid such scams:

  • Always verify the authenticity of a bank draft with the issuing bank.

  • Avoid transactions that involve overpayments.

  • Stay updated with alerts from institutions like the Federal Trade Commission.

The Role of Bank Drafts in Modern Finance and Business

Though electronic transfers and fintech innovations surge forward, bank drafts maintain their stronghold, especially in industries like real estate. In 2017, for instance, Europe saw a significant number of real estate transactions made through bank drafts, signifying their enduring appeal.

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