Banker's draft

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A banker's draft is a cheque (or check) where the funds are withdrawn directly from a bank's funds, not from an individual's account.

[edit] Normal banking cheques

If an individual or company operates a current account (or checking account), they may draw cheques to transfer funds from their account to an account belonging to a creditor. The creditor passes that cheque to their own bank, which will use a clearing house or similar system to arrange for the funds to be moved from the debtor to the creditor during a clearance period of a few days. Any debt is thus settled.

[edit] Banker's draft as a reduction of risk

The problem with normal cheques is that they are not as secure as cash. A cheque received in the post could be potentially worthless if there are insufficient funds for the cheque to be honoured. In this instance, the clearance house or bank will return the cheque to the creditor, who will receive no money. Therefore, any cheque carries the risk that it might be returned unpaid (or "bounced", in the vernacular).

To reduce this risk, a person can request for a type of cheque where the funds are, in effect, drawn directly against the bank's own funds, rather than that of one of their accounts. This is less risky for a creditor, because the cheque will be honoured unless the cheque has been forged or the issuing bank goes out of business before the draft is cashed.

In order that the issuing bank can be sure that its customer has sufficient funds to honour the draft, the bank will withdraw the value of the draft (plus any charges) from the customer account immediately.

Note that like a normal cheque, a banker's draft must go through the usual clearing process and therefore may take around 3-5 days to clear.

[edit] Obtaining a draft

Most high-street banks can issue a banker's draft issued to existing customers for a fee. For example, in June 2007 in the United Kingdom, HSBC charged £15 and NatWest £12 for a banker's draft.

If an individual does not have an account with the issuing bank, he or she can request a banker's draft and pay for it in cash, subject to anti-money laundering requirements and subject to the bank's policies. However, some banks will not do so. For example, in June 2007 in the United Kingdom, neither HSBC nor NatWest would issue a banker's draft for individuals who do not have accounts with them.