Alternate Names: telephone check, preauthorized drafts, remotely created checksAcronym: DD
While a demand draft doesn’t show your signature like a check, it would instead have your name and wording that the transaction was authorized by you, the depositor. When the drawee presents the demand draft to the bank, they’ll be able to get the money you wish to transfer. You can make the request for a demand draft at your local bank or credit union. Sometimes, you can complete the process through their online banking platform for convenience. For example, you might use this method for paying your college tuition. You might also use a demand draft when you need to make a purchase from a company or person that won’t accept cash or a personal check for the transaction. Another example of when you might use a demand draft is when you need to send funds securely to someone internationally. Using a demand draft in that situation makes it easy to send foreign currencies. Demand drafts may be a useful mode of payment, but they are also highly susceptible to fraud. The Federal Reserve amended rules in 2006 to allow for more scrutiny and allocate responsibility for verifying demand draft transactions.
How a Demand Draft Works
Demand drafts are categorized as negotiable instruments, and this means they have some particular characteristics. For example, the receiver or drawee is entitled to receive the money on demand, and the demand draft only allows the named drawee to receive those funds. Further, the demand draft doesn’t make any other promises, such as earning interest, besides providing the agreed money to the drawee upon presentation. Since there’s the flexibility to send money to either a domestic or international bank, this payment option is helpful both for sending money to someone as well as for making foreign currency transactions.
Requirements for a Demand Draft
Your bank requests information about you, the drawee, and the transaction to complete the form used for making the demand draft. For example, you’ll need your bank account and routing numbers so the bank can debit the money from your account. You’ll need information about the drawee such as their name, bank, and their account number if they’re a customer there. You can also expect to provide the reason for the transaction, the amount to pay, and the currency to use. You’ll usually pay a fee for this service, and it can depend on the amount of money sent as well as whether the drawee is with a different bank. If you purchase the demand draft in person, you’ll usually need to fill out a form where you provide the information mentioned above as well as authorize the demand draft verbally or in writing. When purchasing a demand draft on your bank’s website, you should look for a money transfer section to find the option and then fill in the information about yourself, the drawee, and the transaction. Once you submit your request and pay any required fee, your bank will have the demand draft issued within the timeframe they specify.
Demand Draft Transactions
With a demand draft, your bank sends the money from you to the drawee’s bank and orders that bank to provide the money to the drawee on demand. While only that named person can get the funds after the clearing process completes, there’s flexibility where they can use the funds as they see fit. For example, they can present the demand draft and decide to deposit the money into their bank account or take the cash. Let’s say you want to purchase a $500 product from a company, and they request that you use a demand draft. You visit your local bank or go on their website to fill out a demand draft form. You specify the amount to be taken from your bank account and the payment date and provide the drawee’s name and information. Your bank withdraws the funds from your bank account to send to the drawee’s bank, and you pay a fee for the service. Once your bank processes your request and issues the demand draft, the company you’re paying goes to its bank, presents the demand draft with the required documentation, and gets the $500 in cash.
Pros and Cons of Demand Drafts
Pros Explained
Guaranteed funds: Since the money’s taken from you when you ask to send a demand draft, the drawee won’t have to worry about the hassles of a bounced check. This makes a demand draft useful for large transactions. Convenient sending options: Your bank can offer the convenience of sending a demand draft online so you can save a trip to a bank branch. At the same time, you benefit from the convenience of being able to send money domestically or internationally easily with this payment method and choosing from various currencies.
Cons Explained
Requires fees: You’ll most likely have to pay a fee to purchase a demand draft in the first place. Further, you’ll usually pay postage if the bank mails the demand draft. If you need to cancel it or have it revalidated, you can run into more costs that vary by bank. Potential for fraud: Despite demand drafts being considered a secure payment option, there’s the possibility of a scammer taking advantage of you. If you don’t find out about the scam until the demand draft has been delivered to the drawee, you can end up out of your money. Someone could also illegally use your bank account to request a demand draft. However, Regulation J and Regulations CC provide some protection for unauthorized drafts without your signature. Not cancellable after payment: If the funds have been withdrawn from your account, you may not have a recourse. However, you may have the option to cancel a draft or stop payment before it has been encashed by the receiver, usually for a small fee.
Demand Draft vs. Personal Check
A personal check is a common alternative to using a demand draft but has some key differences. When you write a personal check, you’re issuing the check to the drawee as the account holder, while your bank would be the issuer with a demand draft. A personal check also contains your signature as the drawer, while a demand draft would instead include a marking about authorization from the depositor or drawer. Further, a personal check can bounce since there’s no verification at the time of writing that you do have the amount in your account. On the other hand, a demand draft is transferring money you have in your account, so it offers certainty to the drawee.
