Difference between Banker's Cheque and Demand Draft

About Cheque

A cheque is a negotiable document that gives a financial institution instructions on how much money to take out of a designated transactional account that is held on the drawer's behalf at that institution. The payee and drawer may be either legal or natural individuals. Cheques are order instruments; unlike bearer instruments, they are often payable to the payee rather than only to the bearer. The payee may mark a third party to whomever the cheque should be paid by endorsing the cheque in certain nations, such as the US. One kind of bill of exchange that was created to eliminate the need to carry big sums of cash when making payments is the cheque. Paper money originated from promissory notes, which are comparable to cheques in that they were initially written orders to pay the specified sum to the person who was in possession of them (the "bearer").

Terminology

In English, "cheque" is the original spelling. The more modern spelling, cheque (derived from the French), is said to have replaced the older one around 1828 when James William Gilbart changed it for his Practical Treatise on Banking. From the seventeenth century until the twentieth, people interchangeably used the spellings cheque, checque, as well as cheque. But from the 19th century, the financial instrument has been spelt with the French term chèque (cheque), which has become the traditional spelling in the Commonwealth and Ireland. In writing, however, the two definitions are distinguished by the use of the word "cheque," which has various meanings. According to etymological dictionaries, the financial meaning of the word "cheque" originates from "a cheque against forgery," while the term "cheque" as it refers to "control" originates from the chess cheque, a term that entered English through French, Latin, Arabic, and eventually from the Persian word shah, which means "king."

History of Cheques

For a more comprehensive look at this subject, cheque out Banking History.

The cheque originated in the antiquated banking system, where bankers would instruct their clients to pay money to designated payees upon their request. A bill of exchange was the term used to describe such an order. Bills of exchange allowed merchants to buy products and services without having to carry significant amounts of cash, like gold. This made trading easier.

Early phase

Bills of exchange have been used historically. In India, a commercial tool known as the adesha-an order placed on a banker requesting that he pay the note's amount to a third party-was in use throughout the Mauryan Empire (321-185 BC). Prescriptions, an early type of cheque, are thought to have been utilized by the Romans in the first century BC. Banks operating in Persian lands started issuing credit letters in the third century AD. These were referred to as "document" or "contract" letters, or "čak." Later on, traders in the Abbasid Caliphate and other Arab-ruled territories used the čak, which evolved into the sakk. It was more secure to transport a paper sakk than cash. A merchant in one nation might cash a sakk drawn on his bank in another nation in the ninth century. The Sasanid dynasty was referred to as "cheque" multiple times by the Persian poet Ferdowsi in his well-known book Shahnameh.

Tenth-century historian Ibn Hawqal documents the use of a 42,000 dinar cheque written in Aoudaghost. The bill of exchange, a legal mechanism that enabled international trade without requiring the carrying of substantial quantities of gold and silver, was created in Venice during the 13th century. Later, other European nations began to use it as well. Citizens in the Dutch Republic started using "cashiers" to deposit their money in the early 1500s to safeguard substantial cash holdings. For a price, these cashiers held onto the money. Competition forced cashiers to provide extra services, such as giving money to anyone who had a written depositor order. They retained the memo as evidence of their payment. Later, this idea made its way to England and other places.

The modern period

English domestic payments were made with bills of exchange from the 17th century. Then, one kind of bill of trade started to change: cheques. Since a consumer could draw from the funds in their bank account and make prompt payments, these were originally referred to as drawn notes. These were written by hand; among the oldest that are known to still remain was one dated February 16, 1659, and it was written on Messrs. Morris and Clayton, scriveners & bankers with their headquarters in the City of London. The Bank of England was the first to employ a pre-printed form in 1717. Customers were required to pick up a numbered form from the cashier in person, and these forms were printed on "cheque paper" to deter fraudulent activity. The cheque was brought back to the bank for settlement after it was written. The use of cheques was further encouraged in eighteenth-century England by the ban on banknotes.

Up until roughly 1770, London banks would casually trade cheques with one another. Bank clerks went to all the other banks and exchanged cheques, keeping track of the balances between them until they were settled with one another. Around 1770, bank clerks got together at the Five Bells, a tavern on Lombard Street in the City of London, to exchange all of their cheques in one location and pay off any outstanding sums with cash. This marked the beginning of daily cheque clearing. The original bankers' clearing house was this one. To make it easier to clear cheques on banks in the same town, provincial clearinghouses were set up in large UK cities. There were clearinghouses at Birmingham, Bradford, Bristol, Hull, Leeds, Leicester, Liverpool, Manchester, Newcastle, Nottingham, Sheffield, & Southampton.

Following its founding by Alexander Hamilton in 1784, the Bank of New York in America started issuing cheques. A family in New Jersey found the oldest example of a complete American chequebook that has survived, dating back to the 1790s. The documents resemble modern cheques in certain aspects since they consist of pre-printed data on paper sheets with open areas for additional handwritten information that may be added later.

In 1811, the Commercial Bank of Scotland is said to have been the first bank to personalize cheques for its clients by putting the account holder's name vertically along the left margin. A book with fifty, one hundred, and two hundred forms and equivalents, bound or stitched, was introduced by the Bank of England in 1830. These chequebooks evolved into a standard format for distributing cheques to bank clients. Cheque laws were codified in a number of nations in the late 1800s. The Negotiable Instruments Act of 1881 and the Bills of Exchange Act of 1882 in the UK and India, respectively, addressed cheques.

A 1956 English cheque with a red mark from the bank clerk attesting to the signature, a two-penny stamp tax, and manually punched holes to cancel it. This is a "crossed cheque" that prevents money from being transferred to another account. The Geneva Convention on the Unification of the Law Relating to Cheques attempted to streamline the usage of cheques internationally in 1931. Japan joined the convention together with several other states from Europe and South America.

Nevertheless, certain nations, such as the United States and the British Commonwealth, refrained from taking part, making it exceedingly challenging to employ cheques between nations. A machine-readable character standard (MICR) was established in 1959 and subsequently patented in the United States for use on cheques. This made it possible for the first automatic sorting and reading equipment to be used for clearing cheques. In the years that followed, there was a significant shift in the handling and processing of cheques due to greater automation. Cheque volumes kept rising; billions of cheques were processed annually towards the end of the 20th century, making cheques the most widely used non-cash payment option. Cheque volumes peaked in most nations in the late 1980s and early 1990s, and then the use of cheques fell as electronic payment methods gained traction.

Cheque guarantee cards, which allowed a retailer to verify that a cheque would be honoured at a point of sale, were implemented in a number of nations in 1969. The cheque-guarantee-card number would be written on the reverse of the cheque after the drawer signed the document in front of the store, who would then compare it to the signature on the card. Beginning in the mid-1990s, these cards were progressively phased out and swapped out for debit cards. Cheque truncation, in which a physical cheque is converted to an electronic format and sent to the paying bank or clearinghouse, became legal in several countries in the middle of the 1990s. This method saves time and processing expenses and eliminates the laborious physical presentation.

Domestic clearing methods gradually replaced the Euro cheque system in 2002. Although older Euro cheques are now handled by national clearing systems, they may still be used. Several nations used that period to gradually phase out the use of cheques entirely. As of 2010, a number of nations had either completely phased out the use of cheques or indicated that they would in the near future.

Components of a Cheque

• Payee Drawee
• Date of publication
• Quantity of money
• Drawer
• Drawer's signature
• Machine-readable account and routing details

Both the 19th and 20th centuries saw a rise in the use of cheques, prompting the addition of new items to strengthen security or streamline the financial institution's procedures. The primary means of verifying the authenticity of a cheque is through the drawer's signature, which was necessary to authorize the cheque. Secondly, it became standard practice to write the amount both in words and as numbers in order to prevent errors and make it more difficult for someone to change the amount after the cheque was written fraudulently. Although some banks won't accept cheques without the amount written in both words and figures, it is not legally required to write the amount in words.

Cheques now have an issue date affixed to them, and they may lose their validity after a specific period of time. A cheque is usually good in the US and Canada for six months from the date of issuance; beyond that, it becomes stale-dated, though this varies depending on where the cheque is drawn. A cheque in Australia is usually good for fifteen months from the date it is written. A post-dated cheque, which has an issue date that is in the future, might not be accepted until after that date. Writing a post-dated cheque may be frowned upon or even prohibited in some nations. An antedated cheque, on the other hand, has an issue date that is in the past.

To make cheque numbers consecutive, a new cheque number was inserted, and cheque books were printed. It also prevented a single cheque from being presented repeatedly, enabling banks to detect fraud on a basic level. Certain countries, including the US, allow cheques to have a memo line where the purpose of the cheque can be written as a convenience without impacting the official portion of the cheque. Since there isn't a memo line in the UK, these notes can be handwritten on the back of the cheque. The reverse side of a cheque in the United States typically has one or more blank lines at the top that are labeled "Endorse here" when the cheque is positioned vertically. In order to facilitate automated sorting and routing of cheques between banks and the development of automated central clearing facilities, machine-readable routing & account information was appended to the bottom of cheques in MICR format beginning in the 1960s. Each nation's cheque-clearing system establishes criteria for the information presented at the bottom of the cheque, which is distinctive to that nation. This implies that the payee can now deposit the cheque at any bank, including their own, and it will be returned to the original bank, with the monies being transferred to their own bank account. The payee is no longer required to visit the bank that issued the cheque. In the United States, only MICR characters are permitted on the bottom 5/8-inch (16 mm) of cheques. When a cheque passes through the clearinghouse and there is intrusion into the MICR area, it may become problematic. To fix this, a MICR cheque rectification strip must be printed and adhered to the cheque. Many modern ATMs reject cheques because handwriting interferes with the MICR and does not use deposit envelopes; instead, they scan the cheque as it is deposited. In addition to delaying the availability of the balance of the deposit as well as the portion that the bank makes immediately available, this can cause the depositor to have to wait days for the bank to open and may encounter difficulties getting to the bank even when it is open. The MICR portion must be readable in accordance with the terms of service for many mobile deposits (cell phone cameras). Since more characters will be printed to encode the amount after the cheque is signed, not all of the MICR characters have been printed at that time. As a result, a careless signature could hide characters that will be placed there later. The readers will not be able to distinguish pen ink from pre-printed magnetic ink because MICR characters are no longer required to be printed in magnetic ink and will instead be scanned by optical rather than magnetic means. These changes enable the printing of cheques on standard home and office printers without the need for pre-printed cheque forms, as well as ATM deposit capture, mobile deposits, and the ease of electronic cheque copies.

Cheques can be crossed to limit their use and require that the money be deposited into a bank account in order to provide extra security. Different countries have different formats and phrasing for this, but in general, the cheque should have two parallel lines in the upper left corner or across the cheque vertically. It is also required to avoid using the phrases "or bearer" and to cross off any pre-printed information on the cheque on the payee line. Cheques crossed with 'Account Payee' or equivalent cannot be endorsed to a new payee; instead, they can only be deposited into the bank account of the original payee.

Application

The depositor who writes the cheque, known as the drawer, the financial institution where it might be submitted for payment, and the organization to whom the drawer issues the cheque are the parties that often deal with regular cheques. In the US, drafting or drawing a cheque is also known as cutting a cheque, and this is done by the drawer. In the event that a beneficiary is involved, the beneficiary may be designated as "F/B/O" ("for the benefit of") on the cheque, which is deposited with the custodian of a brokerage account.

Finally, there must be at least one endorsee. This endorsee is usually the financial institution that manages the payee's account, but in certain cases, it could also be a third party to whom the payee wants to donate money or owes money.

When a payee receives a cheque, they usually deposit it into an account at their bank and allow the bank to process the cheque. In certain instances, the payee will bring the cheque to a drawee bank branch and cash it there. Cheques that are denied at the drawee bank or returned to the bank where they were placed because there aren't enough funds to clear are referred to as dishonoured cheques. A "paid" or other cancellation mark is applied to a cheque once it has been accepted and all relevant accounts have been reimbursed. The cheque has since been cancelled. Cheques that are cancelled are kept in the records of the account holder. The account holder may ask for verification of a payment in the form of a copy of a cancelled cheque. We call this cycle of clearing cheques.

If additional verification is required in the event of suspected fraud, cheques may be misplaced, go missing, or be delayed during the cycle. As a result, a cheque that has been deposited may occasionally bounce.

At events, symbolic cheques are utilized to represent money that is being offered to the payee. In 2006, the UK Office of Fair Trading established a working group to examine the cheque-clearing cycle due to concerns regarding the length of time it took the Cheque & Credit Clearing Company to complete cheques. Although clearing times may be shortened, their analysis stated that since fewer cheques were being written, the expenses of accelerating the cycle of cheque clearing could not be justified. They did, however, come to the conclusion that the largest issue was the endless period of time a bank may take to return a cheque. In response, modifications were made that established the "certainty of fate" principle, which stated that a cheque could only be returned after six days of deposit.

When using cheques rather than debit cards, the drawer benefits from knowing that the money will not be released by the drawer's bank until a few days later. "Kiting" or "floating" is the practice of paying with a cheque that does not have enough funds to cover the amount drawn on it, then depositing money to the account to cover the amount. This is illegal in the US, but the relevant laws are rarely enforced unless the drawer uses multiple chequeing accounts with different institutions to prolong the delay or steal money.

India's History in Cheques

The Bank of Hindustan, India's first joint stock bank, founded in 1770, was the first to employ cheques. In 1881, the Indian government adopted the Negotiable Documents Act (NI Act), which codified the features and applications of documents such as promissory notes, bills of exchange, and cheques. In 1938, the clearing house was approved by the major bankers' group in Calcutta, the Calcutta Clearing Banks' group.

The Reserve Bank of India (RBI) and the National Payments Corporation of India (NPCI) piloted the cheque truncation system (CTS) starting in 2010. Under CTS, cheques are not physically carried to multiple clearing houses. The bank processes the cheques after they are presented, taking a picture of the cheque using magnetic ink character recognition (MICR) and sending it digitally.

Cheques were still frequently used in 2009 for commerce payments as well as personal payments to other people or utility companies. One of the causes was that individual account holders typically received cheques from banks for free. Nevertheless, in retail establishments where cash & cards are the preferred payment methods, cheques are no longer frequently accepted at the time of sale. In India, as in other nations, the usage of electronic money transfers has grown, and as a result, fewer cheques are written annually. According to data released by the Reserve Bank of India in 2009, the number of cheques written was 5% fewer than in 2008. While cheque usage was still declining, it was doing so slowly, according to a 2019 Reserve Bank of India report. In addition to the effectiveness of India's cheque clearance mechanism, the bank ascribed the slow rate of decline to the fact that the number of cheques had temporarily spiked following demonetization in 2016 before declining further.

Modifications to standard cheques

A variety of modifications were created in addition to standard cheques to meet particular demands or resolve problems that may arise while utilizing a standard cheque.

Drafts from banks and cashier's cheques

Known by other names as bank cheques, treasurer's cheques, banker's drafts, cashier's cheques, and banker's drafts are cheques drawn on the assets of a financial organization as opposed to a specific account holder. In general, the US & most of the Commonwealth use the term "banker's draft," while the UK and other countries use "cashier's cheque." Although the process varies significantly between nations, generally speaking, the bank that issues the draft or cheque will assign the cash at the time the cheque is issued. This gives an assurance that it will be honoured, barring a bank collapse. Scammers can take advantage of the assumption that cashier's cheques are just as good as cash, despite the fact that they are still cheques. While payment is not certain, it is still possible to halt processing a lost or stolen cheque just like any other.

Certified cheque

Upon drawing a certified cheque, the bank in charge of the account confirms that the drawer's account currently has enough money in it to cover the cheque. After that, the money is placed aside in an internal bank account until the payee cashs or returns the cheque. Consequently, in the event that the bank fails, a certified cheque cannot "bounce" and has cash-like liquidity. The bank notates this information on the cheque's face (officially known as an acceptance).

Payroll cheque

Payroll cheques are cheques written out for the purpose of paying salaries. Despite the decreasing prevalence of using cheques to pay wages and salaries, the term "pay cheque" was still frequently used to refer to this process. Warrants are payroll cheques that are given to soldiers by the military or to their employers, beneficiaries, and debtors by other government agencies.

Orders

Although they are not issued against monies that have been cleared in a deposit account, warrants have the same appearance and process through the financial system as cheques. A warrant is not always payable upon demand and cannot be tradable, which is how a warrant varies from a cheque. They are frequently given by governmental bodies, such as the military, to cover supplier or payroll costs. The directive, in this instance, is for the treasurer department of the entity to pay the warrant holder upon demand or upon the warrant's designated maturity date.

Traveler's cheque

The purpose of a traveler's cheque is to reimburse the issuer for the right to pay someone else unconditionally in exchange for the cheque writer's privilege. Due to the fact that many establishments once accepted traveler's cheques as payment, travellers' cheques are usually replaceable if lost or stolen. As a result, people regularly used them instead of cash overseas. The traveler's cheque has started to give way to credit or debit cards as the preferred method of obtaining vacation funds because of their convenience and added security for the merchant. Traveler's cheques are thus no longer accepted by a lot of establishments.

Cash or postal order

A money order, also known as a postal order, is a cheque that is offered by a bank, post office, or retailer, like a grocery shop, for payment in the name of a third party. These are only payable to the designated third party and are secured by the issuing institution. They are paid for in advance whenever the order is drawn. Before the development of electronic payment methods, this was a popular way to transfer small amounts of money to other people while avoiding the dangers of sending cash via postal service.

About Banker's Cheque

A banker's cheque, also known as a pay order, is a non-negotiable document that the bank issues on the customer's behalf and instructs the recipient to pay a certain amount to a specified individual in the same location. Conversely, demand drafts are a type of financial instrument that consumers use to transfer money between locations. The validity term of both demand drafts and banker's cheques is three months; that is, once the three months have passed, the instrument becomes worthless.

Definition of Banker's Cheque

The banker's cheque also called a pay order, is a document that the bank issues on a customer's behalf instructing the recipient to pay a specific amount to a designated individual within the city. The Banker's Cheque has a three-month validity period, although it can be renewed after fulfilling certain legal requirements. The prepaid nature of a banker's cheque eliminates the possibility of dishonour. It is never pre-printed with the phrase "not negotiable," indicating that there is no room for more negotiation.

About Demand Draft

Negotiable instruments like bills of exchange are called demand drafts (DDs). A bank provides a demand draft to a customer (drawer) instructing it to pay a specific amount to the designated party (payee) at another bank (drawee) or one of its own branches.

Another analogy for a demand draft is a cheque. Demand drafts, however, are hard to revoke or countermand. Payable to the bearer, cheques may also be accepted. Demand drafts, commonly referred to as pay-to-order, can only be payable to a designated party, nevertheless. Demand drafts are essentially directives from one bank to another, while cheques are directives from an account holder to the bank. A demand draft will be issued by the bank once a drawer visits the branch, fills out the demand draft form, and pays the required amount in cash or by another method. A demand draft's validity period is three months from the date it was issued. For example, a demand draft or cash is accepted as a form of payment for the mandatory entry price while enrolling in a college. However, the majority of universities don't usually take cheques. This is mostly because demand drafts are thought to be a safer form of payment than cheques, as the drawee must make the specified payment before the demand draft is issued from the bank. Conversely, a cheque might not be authentic because the drawee doesn't know if the drawer has the necessary money in their bank account. A demand draft has an official stamp for enhanced authenticity, although it is not required for the drawer to be a bank customer.

Comparison between Banker's Cheque and Demand Draft