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.

Process of Obtaining Demand Draft

To obtain a demand draft, choose the issuing bank or financial institution from which you want to obtain the draft. If you're not an account holder, visit the bank branch and provide additional identification and documentation. You'll often have to fill out an application form with the required details including the amount to be paid, the name of the payee, and other relevant information.

The bank often asks you to provide supporting documents such as proof of identification and address. This complies with Know Your Customer (KYC) regulations. After you pay the required fees, you'll receive the demand draft in your name with a unique draft number printed on special security paper.

When you receive the demand draft, check the demand draft details. Ensure all information is correct including the payee's name, amount, and instructions to ensure they match your requirements. From there, all that's left is to deliver the demand draft to the payee depending on your preference and bank's policies.

Demand Drafts vs. Other Payment Methods

Demand Drafts vs. 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.

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.

Demand Draft vs. Wire Transfer

A demand draft is a physical payment instrument issued by a bank or financial institution representing a guaranteed form of payment as the purchaser pre-pays the funds. On the other hand, a wire transfer, also known as a bank transfer or electronic funds transfer (EFT), involves the electronic transfer of funds from one bank account to another.

The processing time for a demand draft may vary depending on factors such as the issuing bank and delivery method. However, wire transfers are generally faster than demand drafts. Often completed within hours or minutes, this allows for swift transfer of funds.

Banks typically charge a fee for issuing a demand draft, which may vary depending on the bank and the amount of the draft. Additional charges may apply for services such as courier delivery. Wire transfers usually also involve transaction fees, which can vary depending on the banks involved, the transfer amount, and whether it is domestic or international.

Demand drafts are commonly used for secure transactions such as large amounts, educational fees, property purchases, or settling financial obligations. This is the case where substantiation and secure payment delivery are highly important. Though wire transfers may also be used in this case, wire transfers are a more versatile form of payment that includes regular daily transactions of lower importance.

Demand Draft vs. Online Payment System

Online payment systems are digital platforms that facilitate electronic transactions over the Internet, allowing individuals and businesses to make payments or transfer funds between bank accounts or digital wallets without the need for physical instruments. Compared to demand drafts, online payment systems typically offer faster processing times, allowing transactions to be completed in real time.

While demand drafts often incur transaction fees, more and more online payment systems may also offer free transactions for certain transfers or within specific limits. This may be free transactions based on the number of quantities or free transactions based on the size of the transaction. Consider how popular shopping websites can easily facilitate online payments for free.

Online payment systems have gained significant popularity worldwide, used for various transactions, including e-commerce purchases, bill payments, peer-to-peer transfers, and subscription services. As noted above with wire transfers, demand drafts may be more suitable for more select types of transactions as opposed to online payments which may be used much more broadly.

The Bottom Line

A demand draft is a secure payment instrument issued by a bank that guarantees the availability of funds. It involves the bank deducting the draft amount from the purchaser's account and setting aside the funds. When presented for payment, the funds are transferred to the payee's account. Demand drafts offer security, wide acceptance, and convenience for both parties. They can be obtained from banks by filling out an application form, providing documentation, and paying an issuance fee.