In the modern world, there are many alternatives available to both consumers and businesses when it comes to how they can make a purchase since there are so many different ways to pay, including cash, checks, mobile payments, credit cards, and bitcoin.
Nowadays, in situations when using cash is considered impractical or unsafe, there are alternative modes of payment which include bank drafts, certified checks, and money orders. The major things to think about when comparing bank drafts and money orders are availability, costs, and the amount you need to send.
In this article, we will talk extensively about money orders and bank drafts. This knowledge about them with help you make improved decisions when you run into them when making a purchase or a payment.
What Is A Bank Draft?
Making sizeable payments without taking money out of your account is practical and safe when done with a bank draft. Bank drafts can be used by individuals to pay for goods and services provided by third parties because they are backed by financial institutions.
The majority of currencies can typically be paid with bank drafts. The bank draft can be deposited at any bank, just like cash, by the recipient. The majority of financial institutions provide perpetual bank drafts.
If a bank draft is older than a few months, some financial institutions might not accept it. These instruments are also known as bank drafts and bank checks.
Bank draft fees can range from $0 (if you have a premium bank account) to $9.95, depending on your banking institution and kind of account. You will be charged currency conversion fees if you get a bank draft in a foreign currency.
How Does A Bank Draft Work?
The person making the payment must first request a bank draft from their financial institution. After receiving the request, the bank checks the customer’s account to see if there is enough money for the transfer.
If the individual has sufficient funds, the bank approves the request, withdraws the requested amount from the individual’s account, and issues a bank draft for that amount. The money deducted from the account is frequently transferred to the bank’s reserve account until the beneficiary presents the draft for payment.
Bank drafts ordinarily come at a low cost. However, most bank accounts offer a predetermined number of free bank drafts each year.
The person who will be depositing it and receiving the money is named on the bank draft, which is issued in the form of a paper. The delivery of the bank draft to the payee is the responsibility of the person who purchases it.
When the payee provides the bank draft for payment, the name on the bank draft is used to confirm the payee’s identification. The money is deposited into the payee’s account following identity verification. The processing of the funds can take one to four business days.
Can You Cancel A Bank Draft?
A bank draft is challenging to revoke because money has already been taken out of the buyer’s account and put in the bank’s reserve account. However, the bank can agree to cancel the bank draft and credit the buyer’s account, provided it can verify that the payee has not paid out the draft.
The buyer can visit their bank to obtain a fresh draft and cancel the current one if the bank draft is misplaced or stolen before being handed to the payee. The buyer can also ask the bank to rescind the draft if the transaction is canceled for any reason unless the payee has already cashed it out.
Pricing for Bank Drafts
Money order costs are lower than bank draft costs, which average $10 at all of Canada’s major banks. Bank draft fees are typically smaller for credit unions; they range from $5 to $7 on average.
In many financial institutions’ most extensive bank account service plans, free bank drafts are included.
What Benefits Come with a Bank Draft?
The following are the advantages of using a Bank Draft. They include:
1. Assured funding availability
An electronic bank draft is backed by the bank, unlike a personal check. It indicates that the availability of funds is ensured for the payee. Bank drafts are, therefore, more secure than personal checks, which might be returned unpaid if there are insufficient funds in the payer’s account.
2. More Practical
Another benefit of a bank draft is that it is much simpler and more practical to transfer a sizable sum of money this way as opposed to making a sizable cash withdrawal.
A bank draft, unlike an e-transfer, does not have a maximum amount cap and does not call for the payee’s banking information. Thus, when making significant purchases like buying a house or car, bank drafts are frequently employed.
3. May be applied to international purchases and investments
Bank drafts are frequently used for international trade and investments since they may also offer money in the majority of currencies.
What Drawbacks Does a Bank Draft Have?
A Bank Draft also has some setbacks. They are as follows:
1. Can’t be canceled once it’s been delivered
Bank drafts are irrevocable once they are given to the payee because they represent an already-completed transaction.
2. A victim of fraud
Another significant drawback of a bank draft is that the bank is not liable for replacing any lost monies if the draft is lost, stolen, or altered and the funds are cashed out by the incorrect person. Since bank drafts are typically used for larger purchases, the buyer may suffer significant financial loss in such circumstances.
What Is A Money Order?
This document, which can be issued by a bank or the government, assures the payee that payment will be made upon demand. They are extensively used by persons without access to traditional banking services since they are widely accepted and may be converted into cash.
In Canada, those who don’t have a checking account (and therefore can’t make or receive payments using Interac e-transfers) or who want to send money abroad for less than the cost of a wire transfer are more likely to use money orders. Money orders can be purchased and redeemed at Canada Post locations in addition to being offered by financial institutions.
Money orders are widely accessible in any number of retail locations, including drugstores, supermarkets, and post offices, for anyone with cash on hand. They could be fake, but they’re inexpensive. People should therefore use extreme caution while purchasing them from strangers.
The buyer must state the name of the recipient and the desired payment sum. However, a single money order can only cover up to $1,000; therefore, bigger sums would require numerous money orders.
Once the transaction is complete, a receipt is sent that includes the serial order details. It may be challenging to locate the down payment without the receipt, so the buyer should keep it until they are positive that the money has been processed.
Money Order Charges
Bank drafts are more expensive than money orders. Money orders are always more reasonable when both products are available at the same financial institution. Each money order costs $7.50 in Canada Post.
Money orders often cost between $2 and $7.
Pros of Money Order
The following are the advantages of using money orders:
- They are secure because they omit sensitive data, such as bank account numbers.
- They are free to deposit into a bank account.
- They can be redeemed in nations other than the one in which they were issued.
- They can be redeemed at a nearby bank or credit union.
Cons of Money Order
The following are the disadvantages of using money orders:
- Finding out if a money order was cashed is difficult.
- Cashing may incur fees.
- When money orders are cashed in banks other than the issuer, delays may occur.
- They might be dishonest.
Differences between Bank Draft and Money Order
Money orders and bank drafts are both forms of written and expressed agreements to pay a specific sum at a specific time. Both methods of payment are seen as secure because the payer doesn’t have to move around a lot of cash. But there are a number of distinctions between these two names, which we have emphasized below:
A bank draft is a check that is delivered to the payee following the withdrawal of funds from their account by the issuer.
You’ll need cash to purchase a money order.
Payments made through bank drafts are guaranteed by the bank that issued them and is made on the payer’s behalf.
A “money order” is a document that guarantees payment to the receiver on the given date.
Since bank drafts require private information like a bank account number, they are not a secure way to make payments.
Since a money order lacks any identifying information, it adds an additional layer of security.
Ease of Purchase
Since the issuer must go to their own bank in person, bank drafts are more difficult to obtain than other forms of payment.
Money orders can be obtained from any reputable bank, making them useful and simple to use.
A bank can only make a bank draft on a customer’s behalf.
Any lawful establishment, such as banks, post offices, and large stores, sells money orders.
Similarities between Bank Drafts and Money Order
Both payments are prearranged and printed.
Both are regarded as secure payments because the payer need not carry a sizable volume of money.
Deciding between money orders and bank drafts
The following inquiries may be beneficial when choosing the best payment method:
- What will the payee tolerate?
In order to ensure the availability of funds for certain transactions, a bank draft or money order may be needed. Before making a decision, be certain of what your payee will accept.
- What degree of security and adaptability do I require?
Your choice may be affected if you’re concerned about possible forgeries or want the option to revoke the payment.
- Is there a checking account I can use?
If not, your only choice might be a money order.
- How much will I spend on fees?
Unlike writing a personal check, each of these methods of payment may be subject to an additional charge.
- How can I purchase it?
Some banks no longer offer these alternatives to cash because of the widespread use of electronic money transfers. But money orders are frequently offered at Canada Post facilities.
Can a Money Order or Bank Draft Be Swindled?
Many customers think that because a money order or draft is guaranteed, their bank won’t need to do due diligence while cashing it. Even though it might have been the case, banking institutions must always be on guard whenever a money order is negotiated due to the prevalence of money order fraud.
Numerous well-intentioned bank customers fall prey to fraud and try to haggle over fake bank drafts and money orders they think are real. Romance scams, mystery shopper scams, Kijiji scams, and other types of fraud are all possible.
Due to this, your bank can decide to put a hold on your money when you transfer a bank draft or money order. Consult with your bank in advance to find out whether a hold will be necessary if you need access to the money right away.
Payments made on behalf of the payer and guaranteed by the bank that issued the draft are known as bank drafts. Only banks are permitted to issue these, and they are only delivered to the payee when money has been transferred from the issuer’s account.
You can send money with a money order, which is a document that guarantees payment at a specific time, instead of writing a check. Due to the fact that it may be obtained from a number of reliable organizations, including banks, recognized businesses, and post offices, it is much simpler to obtain.
Both kinds of payment are established and preprinted in advance, despite their variations. These payment options are more convenient for the payer because they don’t require them to carry a lot of money.
Sagar Sridhar is a personal finance blogger from Canada. His genuine passion for personal finance coupled with his unique style of writing is what stands out. Professionally, he is a computer engineer, agile certified and has a master’s degree in Project Management. His writing has been featured or quoted in the leading Canadian publications such as Credit Canada and many other personal finance publications. While he is juggling between his day job and blogging, he is the main author on this blog and has miles to go before making the final pit stop.