Table of Contents
Understanding Guaranteed Payment Instruments
While personal cheques can bounce due to insufficient funds, banker's cheques and demand drafts provide payment certainty because they're prepaid instruments backed by the issuing bank's funds.
Banker's Cheques (Cashier's Cheques)
What is a Banker's Cheque?
A banker's cheque is a cheque issued by a bank drawn on itself, guaranteeing that the funds are available. The bank debits the customer's account immediately and issues a cheque from its own funds.
How to Obtain
Features
| Feature | Description |
|---|---|
| Issuer | The bank itself |
| Funding | Prepaid (funds blocked) |
| Guarantee | Bank guarantees payment |
| Validity | Usually 3-6 months |
| Cost | Bank charges a fee |
When to Use
Advantages
- 1Payment Certainty: Cannot bounce for insufficient funds
- 2Widely Accepted: Treated as equivalent to cash
- 3Faster Clearing: Often same-day or next-day
- 4Trust Building: Demonstrates serious intent
- 5Record Keeping: Bank maintains records
Limitations
- 1Cost: Bank fees apply
- 2Bank Visit Required: Must go to branch
- 3Funds Locked: Money debited immediately
- 4Cancellation: Difficult and fee-intensive
- 5Forgery Risk: Can be counterfeited
Demand Drafts
What is a Demand Draft?
A demand draft (DD) is a prepaid negotiable instrument issued by a bank directing another bank branch to pay a specified amount to the designated payee. It's particularly useful for payments to locations where the payer doesn't have an account.
How to Obtain
Features
| Feature | Description |
|---|---|
| Issuer | Bank branch |
| Drawer | Issuing bank |
| Drawee | Specified bank/branch |
| Funding | Prepaid |
| Geographic Reach | Can be drawn on distant locations |
When to Use
Comparison: Banker's Cheque vs. Demand Draft
| Aspect | Banker's Cheque | Demand Draft |
|---|---|---|
| Drawer | Bank | Bank |
| Drawee | Same bank | Can be different branch |
| Geographic Use | Local | Local and outstation |
| Account Required | Yes | No (can pay cash) |
| Stop Payment | Possible with conditions | Possible with conditions |
| Cancellation | Bank process | Bank process |
| Typical Use | Local high-value payments | Distance payments |
Costs and Fees
Typical Fee Structure
Cost Comparison Example
For a $10,000 payment:
| Instrument | Typical Cost |
|---|---|
| Personal cheque | Free or minimal |
| Banker's cheque | $10-15 |
| Demand draft | $15-35 |
| Wire transfer | $25-50 |
Security Considerations
Fraud Risks
Security Features
Both instruments typically include: - Watermarks - Security paper - Bank holograms - Microprinting - Unique serial numbers
Cancellation and Stop Payment
When Cancellation is Needed
- Instrument lost
- Transaction cancelled
- Payee changed
- Amount error
Cancellation Process
Waiting Period
Banks typically require: - 15-30 days if instrument available - 60-90 days if instrument lost - Indemnity bond for lost instruments
Lost or Stolen Instruments
Immediate Steps
- 1Report to issuing bank immediately
- 2Request stop payment
- 3File police report (for large amounts)
- 4Complete required declarations
- 5Request duplicate (if needed)
Getting a Duplicate
Best Practices
For Buyers/Payers
- 1Keep photocopies of issued instruments
- 2Note serial numbers
- 3Track delivery to payee
- 4Retain receipts
- 5Follow up on encashment
For Sellers/Payees
- 1Verify authenticity before delivering goods
- 2Allow clearing time
- 3Contact issuing bank for verification
- 4Be cautious of overpayment requests
- 5Deposit promptly
Conclusion
Banker's cheques and demand drafts serve important roles in providing payment certainty for significant transactions. While they involve costs and additional processes compared to personal cheques, the security they provide often justifies their use for important payments.