Bank drafts are a method of payment similar to a traditional check, but with some distinct differences. Drafts are most commonly used for large payments. This is because in most circumstances, the payment is guaranteed to a greater extent than with a personal check.
The main purpose of bank drafts is to offer a blend of the convenience of cash with a level of security even greater than with a personal check. This is reflected in a common alternative name for bank drafts: cashier’s checks. The main technical difference between a cashier's check and a personal check is that the bank draft is “drawn” on the bank itself rather than an individual’s account. The bank draft is more commonly used for large payments to individuals than to companies. This is because companies will normally have facilities for receiving either electronic transfers or card payments.
There are several physical characteristics that distinguish bank drafts from checks and similar documents. The name of the person using the bank draft for payment does not appear on the document. Although the person making the payment gets the draft, it is the recipient’s name which appears on the document. There will often be added security measures such as a hologram on the document. In many cases, the document will be signed by two representatives of the bank rather than just one person.
The precise rules governing bank drafts vary from country to country. The general principle is that the payment is guaranteed, either up to a certain level or to an unlimited amount. This means that somebody accepting the bank draft does not have to worry about it bouncing due to insufficient funds. This makes it a very popular method to pay for expensive items such as cars or even houses.
There are some limitations to this guarantee. Banks retain the right to cancel the payment on a bank draft and take back the money from the recipient if the check proves to be counterfeit or fraudulent. In most areas, there is a deadline for doing this, usually somewhere up to two weeks. This can cause confusion as the bank may tell the recipient the draft has cleared shortly after they pay it in, then come back later to say it has been found to be counterfeit. Therefore, some people accepting bank drafts as a means of paying for mail order goods may insist on waiting until the deadline for a check being declared counterfeit has passed before sending the goods.