Banker's Draft

A banker's draft is a cheque that a bank draws on itself, rather than on a customer's account, so that payment is promised by the bank. The customer asks for the draft and pays for it in advance, either from their account or in cash; the bank then issues a cheque in the name of the person to be paid. Because the bank is both the drawer and the payer, the recipient does not have to worry that the customer's account lacks funds. In the US the same instrument is called a cashier's check, and in South Asia it is known as a demand draft or, for local payments in Pakistan, a pay order.

Banker's drafts were long the standard way to make large one-off payments where trust matters, such as buying a car or a house, paying court and government fees, or settling a deposit. They are a special form of check or cheque and descend from the older bill of exchange. Electronic transfers have replaced them for many purposes, but they are still issued in most countries and are still a favourite tool of fraudsters who forge them.

Imagine buying a used car from a stranger. The seller does not want an ordinary cheque, because it might bounce after they hand over the keys. You do not want to carry a bag of cash. So you go to your bank, hand over the money, and the bank gives you a cheque signed by the bank itself. The seller trusts the bank, not you.

It is a bit like buying a voucher at a shop counter: the money has already been paid, so the voucher is as good as the shop that issued it. The catch is that a convincing fake voucher looks just like a real one.

1. The customer asks the bank for a draft for a set amount, payable to a named payee.
2. The bank takes the money from the customer's account, or in cash, plus any fee, and places it in its own account.
3. The bank prints the draft, signed by its officers and drawn on the bank itself, often with security features.
4. The payee pays the draft into their own bank account, and it clears like other cheques, with the issuing bank paying from its own funds.

Because the money has already left the customer's account, a draft cannot simply be stopped like a personal cheque. If it is lost or stolen, the bank usually requires an indemnity before it will cancel and reissue it. Drafts are payable only to the named payee, and many are crossed so that they can only be paid into an account.

• United Kingdom and Commonwealth. Banker's draft or bank draft, used for property completions and car purchases before faster electronic payments took over.
• United States. A cashier's check is drawn by the bank on itself. A teller's check is drawn by a bank on another bank, and a certified check is a customer's cheque that the bank has guaranteed. A money order is a cheaper, lower-value prepaid instrument.
• India, Pakistan and Bangladesh. A demand draft is payable at a branch in another town or by another bank, while in Pakistan a pay order is usually used for payments within the same city. Both are widely required for tenders, university fees and government payments.

In the US, federal funds availability rules generally require banks to make the first part of a deposited cashier's, certified or teller's check available more quickly than an ordinary cheque, usually by the next business day when deposited in person.

Instant and same-day bank transfers have taken over many of the jobs drafts used to do. In the UK, house purchases are now usually completed through CHAPS, and smaller payments through Faster Payments; in the US large sums move by Fedwire. An electronic fund transfer settles quickly and leaves a clear audit trail, while a draft is paper, must be carried or posted, and takes time to clear. Drafts remain useful where the payee wants a guaranteed instrument in hand on the day, or where the payer has no electronic route, and they can be part of an escrow or completion arrangement.

Because people trust drafts, forged ones are common in fraud. In a typical scam, a buyer pays for goods or a car with a draft or cashier's check for more than the price and asks the seller to send back the difference by transfer. The bank may make the money available within a day or two, but the fake draft is discovered later, the deposit is reversed and the seller loses both the goods and the "refund". Related schemes include advance fee fraud and payment diversion fraud. Sensible precautions include:

• Verify with the issuing bank. Call the bank using a number found independently, not one printed on the draft.
• Wait for final clearance. Money being available is not the same as the draft having been paid.
• Be wary of overpayments. A request to refund part of a draft is a classic warning sign.

Banks charge a fee for issuing a draft, listed among their bank charges, and the request is usually handled by a cashier or customer service officer at a bank branch.

• Regulation CC (Availability of Funds and Collection of Checks), 12 CFR Part 229