Demand Draft
A demand draft is a method used by an individual to make a transfer payment from one bank account to another. 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. For example, if 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. 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. Also, a demand draft is drawn by an employee of a bank while a check is drawn by a customer of a bank.
What Is a Demand Draft?
A demand draft is a method used by an individual to make a transfer payment from one bank account to another. Demand drafts differ from regular normal checks in that they do not require signatures to be cashed. 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 Drafts
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. Demand drafts 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.
For example, if 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 Drafts Versus Checks
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.
Because a demand draft is a prepaid instrument, payment cannot be stopped, whereas payment of a check may be denied for insufficient funds.
Although a check can be hand-delivered, this is not the case with a demand draft. The draft 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.
Related terms:
Check
A check is a written, dated, and signed instrument that contains an unconditional order directing a bank to pay a definite sum of money to a payee. read more
Checking Account
A checking account is a deposit account held at a financial institution that allows deposits and withdrawals. Checking accounts are very liquid and can be accessed using checks, automated teller machines, and electronic debits, among other methods. read more
Deposit in Transit
A deposit in transit is money that has been received by a company and sent to the bank, but it has yet to be processed and posted to the bank account. read more
Drawee
A drawee is the party directed by a depositor to pay a certain sum of money to the person presenting the check or draft. read more
Federal Reserve System (FRS)
The Federal Reserve System, commonly known as the Fed, is the central bank of the U.S., which regulates the U.S. monetary and financial system. read more
Foreign Draft
A foreign draft is essentially a bank draft that is drawn on a financial institution in the non-home country of the currency needed. read more
Negotiable
Negotiable refers to the price of a good or security that is not firmly established or whose ownership is easily transferable from one party to another. read more
Payable-Through-Draft (PTD)
Payable-through-draft (PTD) is a payment instrument used by a corporation to pay bills and claims through a specific bank. read more
Payee
The payee is the party in an exchange who receives payment for goods and/or services of some type. read more
Transfer Payment
A transfer payment is a payment of money, usually from the government, for which there are no goods or services exchanged. read more