Drawee

What Is a Drawee?

A drawee is the party instructed to pay money on behalf of another. In banking and finance, the drawee receives a payment order—such as a check, bill of exchange, or money order—and is responsible for transferring funds from the payer’s account (the drawer) to the person presenting the instrument (the payee).

Role in Financial Transactions

• Acts as the intermediary that honors payment instructions and moves funds from the drawer’s account to the payee.
• Commonly a bank or financial institution that holds the drawer’s funds and processes checks, wire transfers, and similar instruments.
• Other entities can function as drawees when they accept and fulfill payment instruments (often for a fee).

Common drawee activities:
* Verifying the validity of the instrument (signature, available funds, identification).
* Debiting the drawer’s account and crediting the payee or paying cash.
* Charging service fees when applicable (e.g., check-cashing services).

Examples Outside Traditional Banking

Non-bank entities can serve as drawees in practice:
* Check-cashing services and payday lenders: cash checks or money orders for customers, typically charging a fee.
* Money order and wire-transfer companies: honor instruments issued to payees and distribute funds.
* Retailers accepting manufacturer coupons: the retailer acts as the drawee by honoring the coupon; it later seeks reimbursement from the coupon issuer (the drawer).

Parties in a Drawee Transaction

Three parties are involved:
* Drawer (payor): the person or organization that issues the payment instrument and instructs the drawee to pay.
* Drawee: the entity asked to make the payment (bank, payment company, retailer in coupon cases).
* Payee: the person or entity receiving the payment.

Payor vs. Drawee

The payor (often called the drawer) is the party with funds who issues the payment instruction. The drawee is the party that receives that instruction and is charged with honoring it. In practical terms, the payor provides the funding and the drawee executes the payment.

What Happens When a Drawee Receives a Bill of Exchange?

A bill of exchange is a written order requiring the drawee to pay a specified sum to the holder of the bill. When a drawee receives such an instrument, it:
* Confirms the document’s authenticity and terms.
* Checks that funds or backing are available (depending on the arrangement).
* Pays the presenting payee or credits their account according to the instruction.

Practical Notes

• Fees: Non-bank drawees (check-cashing services, payday lenders) often charge fees for honoring instruments.
• Reimbursement: In cases like coupons or third-party instruments, the drawee may be reimbursed by the drawer or issuer, so the drawee doesn’t bear the final cost.
• Legal obligations: Banks and other financial institutions operate under regulations that govern when and how they must honor or dishonor instruments.

Key Takeaways

• A drawee is the party tasked with executing a payment instruction and transferring funds to the payee.
• Banks are the most common drawees, but other businesses (check-cashers, money-order companies, retailers accepting coupons) can act as drawees.
• Every drawee transaction involves three parties: drawer (payor), drawee, and payee.
• Drawees verify instruments, manage fund transfers, and may charge fees or seek reimbursement depending on the arrangement.