Demand Drafts: A Secure Prepaid Bank Payment

Key takeaways
* A demand draft (DD) is a prepaid bank instrument that transfers funds to a payee without requiring the drawer’s signature.
* Because funds are debited when the draft is issued, DDs generally provide a guaranteed form of payment and reduce the risk of bouncing.
* Processing typically takes a few business days; wire transfers and many online payments are faster.
* Verify details before delivery and contact the issuing bank immediately if a draft is lost, stolen, or needs cancellation.

What is a demand draft?
A demand draft is a physical, prepaid payment instrument issued by a bank on behalf of a customer (the drawer) to pay a named payee. The issuing bank debits the drawer’s account at the time of issuance, so the draft represents guaranteed funds when presented to the paying bank.

How demand drafts work
* Drawer: the customer who requests the draft and provides funds to the issuing bank.
* Drawee/Issuing bank: the bank that issues the draft and debits the drawer’s account.
* Payee: the recipient who presents the draft to a bank to collect payment.

Because the bank remits payment on the basis of funds already collected or reserved, demand drafts are less likely to bounce compared with personal checks. The draft carries a unique number and is printed on security paper.

When to use a demand draft
Demand drafts are commonly used for:
* Large or high-value transactions where guaranteed payment is required (property purchases, tuition fees, vendor payments).
* Situations where a payee requires a bank-issued instrument rather than a personal check or electronic transfer.
* Cross-branch or interbank payments where a physical instrument is preferred.

How to obtain a demand draft
1. Choose the issuing bank or financial institution. Non-customers may often request a draft by presenting identification.
2. Visit the branch (or use the bank’s prescribed process) and complete the application with the payee’s name and amount.
3. Provide required identification and proof of address to satisfy Know Your Customer (KYC) rules.
4. Pay the draft amount plus applicable issuance and service fees (courier charges if applicable).
5. Receive the draft—check the payee name, amount, and draft number before delivery.

Comparing demand drafts with other payment methods

Checks
* Issuer: individuals issue checks; banks issue DDs.
* Guarantee: checks can bounce if insufficient funds; DDs are prepaid and generally present guaranteed payment.
* Stop payment: a written stop on a personal check is straightforward; stopping a DD is more complicated because funds are already debited.

Wire transfers (electronic funds transfers)
* Mode: DDs are physical instruments; wire transfers are electronic.
* Speed: wires are typically faster (minutes to hours); DDs usually take several business days to clear.
* Use case: wires are convenient for fast transfers and day-to-day transactions; DDs are preferred when a bank-issued physical guarantee is required.

Online payment systems
* Speed and convenience: online platforms often provide near‑real‑time transfers and broader consumer convenience.
* Cost: some online systems offer low-cost or free transfers within limits; banks charge issuance and service fees for DDs.
* Suitability: online systems are ideal for routine e-commerce and peer-to-peer payments; DDs suit formal, verifiable settlements where a physical instrument is requested.

Clearing time and fees
* Clearing time: typically a few business days, depending on the banks involved and presentation method.
* Fees: banks charge an issuance fee for the DD and may add courier/delivery fees. Fees vary by bank and amount—confirm with your bank beforehand.

Cancellation and lost or stolen drafts
* Stopping payment: because DDs are prepaid and funds are debited on issuance, stopping payment is often difficult. Some banks will accept a cancellation request, but it usually requires written application, supporting documents, an indemnity, and payment of cancellation fees. Success is not guaranteed if the payee has already encashed the draft.
* Lost or stolen: contact the issuing bank immediately, provide draft details (amount, draft number, payee), and follow the bank’s procedures. Prompt reporting improves the chance of recovery or cancellation.

Practical tips
* Always verify the payee name, amount, and draft number before handing over a demand draft.
* Keep a copy or note of the draft number and issuance receipt.
* Ask your bank about processing times, fees, and the specific cancellation procedure before requesting a draft.
* For urgent transfers, consider a wire transfer or online payment instead of a DD.

Bottom line
A demand draft is a secure, bank‑issued, prepaid payment instrument that provides a reliable way to transfer funds—especially for large or formal transactions where guaranteed payment and a physical instrument are preferred. Evaluate clearing times, fees, and cancellation policies relative to electronic options before choosing a DD.