Answering, What is a Bank Draft: Examining How Three Types of Bank Drafts Work

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Bank drafts are a safer payment alternative that instills security in the person who requests them and the person or business that receives them. Even though many banks are pushing through initiatives to significantly reduce paper use, via such payment methods as account clearing house (ACH) debits/credits and credit/debit card transactions, these methods can not provide the security a bank draft does. Discover the three main forms of bank draft along with the pros and cons of each.

What a Bank Draft is

A bank draft simply is a guaranteed check issued by a bank. A person who requests a bank draft will directly fund the draft and pay a fee to the issuing bank for holding the funds until the bank draft is redeemed. There are three main forms of bank drafts in use, the cashier’s check, certified check, and money order.

The Cashier’s Check

A cashier’s check is a type of bank draft. How a cashier’s check works is you give the bank the exact amount of money that the check is to be written for. Next the bank takes this money and deposits it into their own account and charges you a fee for this. The bank is now responsible for making sure funds are available when the check is cashed. A cashier’s bank can be obtained at a financial institution regardless if you hold an account there or not.

Certified Checks

Another type of bank draft is the certified check. Unlike a cashier’s check, certified checks can only be obtained if you hold an account with the issuing bank. You may only request this type of bank draft from your bank if you have the face value of the draft available for use in your account. The bank will place a hold on the funds for the certified check to make sure it is available when the recipient cashes it. Your bank will charge a fee for certifying the check. One downside of the certified check is that unlike a personal check, a stop payment cannot be placed on it.

Money Orders

Money orders are also a type of bank draft. Probably the most widely used form of bank draft, money orders are purchasable at financial institutions and agents of financial institutions. Money orders are purchased or have a fee associated with them. The face value of the bank draft is deposited with the financial institution. Unlike certified checks and some cashier’s checks, you are responsible for filling in the payee information. A stop payment can be placed on a money order either for a flat fee or a percentage of the bank draft value. One drawback of the money order is that they tend to only be issued in smaller amounts, mainly under a $1,000.00.

Bank drafts are a very convenient form of payment for many businesses. You and the payee are secure in knowing that the draft won’t bounce. In addition, your banking account information is not exposed as the account on the draft belongs to the issuing bank. When choosing a form of bank draft, pick the option that best fits your needs.