The rise of electronic banking provides payees with a variety of methods to make payments, although older methods of payment, such as bank drafts, remain valid systems of payment. Although similar to other written banking instruments like checks, bank drafts allow merchants the ability to purchase and inspect goods without paying for them immediately -- a method that allows buyers the ability to secure advance payment without the need for the seller to extend credit to them.
Bank Draft Basics
In essence, bank drafts are simply banking instruments similar to a check, but with an intermediary party between the buyer and a seller, such as a bank. Cashier's checks are a common form of bank draft. Bank drafts signify the holder of the draft -- who may or may not be the payee named on the draft, depending upon the type of draft -- is pre-approved to receive an amount of funds from the payee's bank account. Because of the intermediary party involved, bank drafts pose less risk of insufficient funds to the seller.
Types of Drafts
Some types of drafts are pre-printed in booklets such as checks, and may be given to sellers following a sale; the seller can cash them without the necessity of an account holder's signature because of the pre-authorized nature of the instrument. Other bank drafts are largely electronic transactions, with payers providing written authorization for another party to electronically deduct funds from an account. Some drafts may be payable immediately, while others may be legally backdated -- unlike checks -- to authorize payment at a later date.
Liability in Drafts
When a payee receives a standard check, the liability to pay the amount falls back on the payer. If the check doesn't clear, the payee must seek direct compensation from the payer. When a payee receives a bank draft, primary liability shifts to the payer's bank, which issued the draft. The bank is then responsible for receiving payment from the payer. If a bank refuses to honor a draft, the liability for the payment reverts to the payee. Because banks are likely to honor a draft, they are considered a more secure form of payment than checks.
In addition to the increased reliability in receiving bank drafts that payees enjoy, many organizations accept drafts for other reasons. Drafts typically clear faster than checks, particularly when payer and payee are in different countries. Unlike Automated Clearing House, or ACH, transactions, there are no additional fees to process a draft. At times, payers prefer drafts, as they provide buyers the ability to receive goods if they didn't have funds to pay for them at the time of purchase, but will in the near future. Additionally, drafts provide consumers with a no-hassle method to make recurring or large payments at a later date.