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.
A demand draft is a way to initiate a bank transfer that does not require a signature, as is the case with a check.
A demand draft is a prepaid instrument; therefore, you cannot stop payment on it in the case of fraud or mis-intended recipient.
Because demand drafts can be used to defraud people, there are regulations now in place that allow victims to recover funds from the holding bank.
Characteristics of a Demand Draft
- It is issued by the bank to another bank.
- It is considered to be a prepaid negotiable instrument because the money is taken from the drawer’s account when it is issued. Therefore, when the payee cashes it out, it will not bounce due to insufficient funds since the payment is already made by the drawer. As a result, it is more secure and comes with less risk compared to a check.
- It is only payable to the payee written on the demand draft, and it is payable on demand. It means the payee can immediately be paid the specified amount and cannot be stopped from payment once he/she presents it to the bank to be cashed out.
- It does not require the use of a signature to authorize the transfer of funds. It can be authorized remotely by fax, phone, or online. Instead of a signature, it will say “authorized by depositor” or “authorized by drawer.”
Types of Demand Drafts
1. Sight demand draft
A slight demand draft is payable immediately, and it is often used when purchasing goods internationally. For example, when a seller ships goods to a buyer, the seller still possesses the title of the goods until the buyer receives the goods.
The buyer can use a sight demand draft to transfer funds to the seller instantly so the seller can immediately transfer the title of goods to the buyer.
2. Time demand draft
A time demand draft comes with a set payment date in the future, and it is not payable immediately. It is only payable in full after a certain amount of time when the goods are received by the payee.
In international trade, some exporters and importers may prefer to use a time demand draft. For example, an importer issues a time demand draft to the exporter, but payment in full can only be made 15 days after the arrival of the shipment of goods and the transfer of the title of goods to the importer.
When is a Demand Draft Used?
A demand draft can be used when you purchase items online or over the phone. It can also be used when there are recurring debits from your bank account, such as bill payments.
Other common uses include return item fees, customer payments made remotely from the company, and transfer payments between different bank accounts. Therefore, demand drafts can usually be accepted by telemarketers, utility companies, credit card companies, and insurance agencies.