Learn something new every day
More Info... by email
A demand draft is a financial instrument created by a merchant that bears the account number of a buyer, but does not carry the original signature of the buyer. Depending on the nature of the transaction, the draft may carry a facsimile of the buyer’s signature, or some type of signature disclaimer. The use of these remotely created checks has become popular among a wide range of consumers for use in purchasing activity such as paying household bills electronically or making purchases over the phone. This instrument can also be known as a remotely created check.
The use of a demand draft is subject to the standards and regulations that are put in place by government agencies and the banking industry within the nation where the transactions take place. In most cases, this type of drafting is not promoted as being a better option than other payment methods, or even as being the only option. In most cases, regulatory codes simply identify the types of situations where a demand draft may be presented by a merchant, and what the merchant must do in order to process the draft in accordance with current regulations.
There are a few advantages to the use of a demand draft over other types of payment options. One has to do with how quickly the seller’s account is credited with the funds. Unlike credit card transactions, where it may take anywhere from twenty-four to forty-eight hours for the money to appear in the merchant’s bank account, the funds from a demand draft are normally posted on the same day of the transaction. For the consumer, the use of this type of draft also means there is no amount applied to a credit card balance that is in turn subject to interest. The funds are drawn from the buyer’s checking or savings account, often with no additional fees assessed for the transaction.
A major drawback to the use of a demand draft is the increased potential for fraud. Since no signature is required in most cases, unscrupulous individuals could obtain the bank account information and make unauthorized purchases with relative ease. This inherent weakness has led to use of the demand draft as part of various scams involving both domestic and international fraud. For this reason, consumers should take steps to protect their banking information, and only provide it to vendors they know well and can reasonably trust.
One of the most common forms of the demand draft is using the payment method to order items over the phone. The customer places the order, then provides the merchant with key information, including his or her bank account number, and the routing number for the bank where the account is active. The merchant uses this data to prepare the draft, and submits it for payment. This method can be used for one-time purchases, or to create a recurring payment using the same data, an approach that businesses sometimes use as a means of paying monthly invoices issued by their suppliers.