What is a banker's draft?
"I want to move to a new flat and my letting agent wants my deposit paid via banker's draft. What are they and how do they work?"
Like standard cheques, banker's drafts - also known as banker's cheques - are becoming less common, but they're still used by the likes of letting and estate agents and car sales yards, where we need to make large one-off transactions.
But what's so special about them, and how do we get one? In this guide we'll explain all.
What is a banker's draft?
Put simply, a banker's draft is a cheque that our bank writes for us.
When we write a cheque, there's no guarantee that the money will be available in our account when the recipient goes to cash it. But when we ask for a banker's cheque, we have to pay them the full amount plus any required fees (usually between £10 and £20 per request), before they'll issue it.
The payee is therefore getting their money not from our account, but from the bank's head office account - and barring fraud or exceptional circumstances, they know that the promise to pay them the amount on the draft should be honoured.
That makes a banker's draft more secure for bigger value transfers and transactions, like the tenancy or mortgage deposit examples mentioned above.
How do I get one?
Getting a banker's draft is fairly simple, but it can take a little time. If we pop into a branch it can take as little as half an hour from request to having the draft in our hands, but some banks will ask for at least 24 hours' notice.
Most obviously, we need to have the funds available in our own account, or be able to pay them in for immediate use (no paying in cheques from another account).
We'll also need to provide details of the exact amount to be paid, and who the draft should be made out to: only the named payee can use the draft.
Many banks that provide banker's drafts will take requests over the phone, so they'll also need to know which branch we want to collect the completed draft from.
When we go to collect it we'll need proof of ID; Barclays recommend bringing in two forms (one photo, one with our address).
Once we've presented the draft to the payee it can take anything from four days to a couple of weeks for the funds to clear.
Can I ask for payment by draft?
If we're selling our car privately and we want to be sure that a buyer's cheque won't bounce, a banker's draft might seem attractive - and there's nothing to stop us requesting one.
But as with cheques they take a while to clear, and as we'll explain further down they're not as secure as they once were.
Anyone who wants to be paid by banker's draft should be willing to hang on to their goods for at least six working days after receiving the draft to ensure that it's genuine and that the money is ours to keep.
Alternatives to a banker's draft
Not all financial institutions provide banker's drafts - building societies will issue counter cheques instead, for example. The other, increasingly common, alternative is to see if the funds can be transferred electronically instead.
Building society counter cheques are basically the same as banker's drafts, with one important difference - we can request that they be stopped (see why this is important below).
Some building societies will issue them fee-free, while others charge to issue them - expect to pay around £10 where a fee is requested.
Electronic transfers are quicker and more convenient. Many of us will have used Faster Payments frequently without realising; there's another more secure system known as CHAPS.
This is the system favoured by solicitors and financial providers for transferring money between themselves; as long as the instruction to make the payment is received before 3pm the money will be received and cleared for use in the payee's account the same day.
There's no minimum or maximum transfer limit as long as we have the money available - and the payments of funds is guaranteed and irreversible. Our name, address, and account details are included with the transferred funds, which makes them more secure for the recipient.
As we might expect, there's a charge for this heightened level of service - £20 to £30 per request.
Problems with banker's drafts
As well as seeming rather old fashioned these days, banker's drafts are falling out of favour because they aren't as secure as they're supposed to be.
Because they're drawn on the bank's own accounts, the perception is that they're as good as cash - and certainly, if we've been asked to pay via banker's draft, we should treat the draft itself as carefully as we would if we were carrying the funds around in notes.
For this reason, banker's drafts have become firm favourites with fraudsters and criminals.
Most of us will see them so rarely that we have no idea what a genuine draft looks like, making them attractive to counterfeiters - and despite the need for them to be made out to a named payee, they can be stolen and cashed fraudulently.
Stopping a draft
This problem is exacerbated by the conflicting advice given about whether banker's drafts can be stopped or not.
The Financial Ombudsman Service says that "a genuine banker's draft cannot be stopped - even if it is lost or stolen" - but this seems to be the case only if it's us requesting that the draft be stopped.
Consider this real life example featured in the Mail on Sunday in 2016 as illustration:
A couple received a banker's draft for £10,000 issued by Halifax. But when they deposited it in their Lloyds account, they were told that Halifax had been given a "signed declaration" that the draft had been lost, and that it wouldn't be honoured.
Halifax say they "acted in good faith" and cancelled the draft on receiving this declaration.
So if we're using a banker's draft to pay for something ourselves and we lose it somehow, it's crucial that we report that loss immediately - but it's up to the issuing bank to order that the draft be stopped.
Conversely, if we're receiving payment via banker's draft, we're at the mercy of the person paying us to be honest by not reporting it lost or stolen themselves.
Even if we deposit the draft without any issues and it looks like it's been honoured, we should still wait for six working days to elapse before we can be sure the money is definitely ours.