Bank Drafts - Too Dangerous to Trust

From lost and misdirected mail to straight theft, cash, as you likely already know, isn't a good way to send money to another person. 


A simple alternative (for those tech-savvy enough) is an Interac e-transfer.  However, restrictive limits like $3,000 per day and $10,000 in one week can make it a limiting choice when looking to transfer larger sums of cash.  For this reason, many turn to a good ole fashioned bank draft when they need to move bigger amounts.


Bank drafts, until recently, proved to be one of the safest methods to transfer larger sums of money.  That is, until the Taylor family (based out of Ontario, Canada) had a negative experience highlighting the potential risk of bank drafts.  The Taylor family, when divvying up inheritance, used a bank draft to send a portion of inheritance to one sibling.  Sadly, the bank draft, totalling $846,000 went missing in the mail - leaving the funds sitting in limbo too.  More details on this shortly.


A Bank Draft - Different than a Traditional Cheque


As both a bank draft and traditional cheque look similar in regards to their appearance, it can be confusing to understand their differences.  When a personal cheque is written, the money isn't withdrawn from the sender until the receiver receives, then deposits the cheque in their bank account.  The date a receiver deposits a cheque can be highly varied due to the time of receipt (as a result of transit - mail etc.) in addition to the receivers sense of urgency (a cheque might be received, but held by the receiver until they choose to deposit it).  As such, it's hard for the sender to know when to expect the funds to be withdrawn from their account.  For this reason, personal cheques can be somewhat unreliable as the sender (by accident) may become overdrawn (leaving too little money in their account) resulting in frustration and monetary penalties for the sender and the receiver.


In contrast, when a sender requests a bank draft, the banking institution immediately transfers the funds from the sender's bank account to the bank's bank account where it's held until it's cashed.


As an example, if I wanted to send someone $15,000, I would go to my bank and request a $15,000 bank draft.  The bank would charge me $13.00 or so, then they would withdraw $15,000 from my account and transfer it into an account held by the bank.  Because the $15,000 is withdrawn immediately, bank drafts are considered guaranteed - unlike personal cheques.


Similar to personal cheques, bank drafts may also experience a hold period once deposited.  A hold period is a set amount of time (often 7 days depending on the institution) for the bank to verify the validity of a deposit - during this time, none or only some of the total amount deposited would be accessible.


But, What Happens When a Bank Draft Goes Missing?


After reading recent headlines, it's important to understand the risks associated with sending a draft that becomes lost before reaching the recipient.


A Frustrating Scenario


Lorette Taylor was tasked with splitting inheritance from her father's estate in February of 2017.  The funds were to be split between herself, her brother and her sister.  As her brother lived quite a distance away, she requested a bank draft from TD Canada Trust in the amount of $846,000 (his portion of the inheritance) and send it to her brother via UPS.


The bank draft went missing, never reaching Lorette's brother.


UPS conducted an exhaustive search but was unable to find the bank draft.  As UPS failed to deliver the package - they refunded Lorette the $32 it cost her to ship the cheque - a far cry from the intended $846,000.


10 months later, Lorette's brother was still waiting to receive his inheritance.


Keep in mind, that the money itself was secure with TD Canada Trust - the problem however, was that unlike a personal cheque, a bank draft has no expiry date.  This is why a bank draft is challenging to cancel. 


TD was left reluctant to release the funds to Lorette's brother as they risked another individual fraudulently cashing the draft - in essence leaving them on the hook for $846,000 twice.


While TD Canada Trust eventually said they'd release the $846,000, they wanted her to sign an indemnity agreement.  This meant, Lorette, not TD, would be responsible to cover the loss of a fraudulent attempt on the missing bank draft.


In addition, TD Canada wanted to place a lien against Lorette's home and even take out GIC's in the full amount of the draft. 


The above was my summary of a news article - to read a more detailed version of this story - click here.


As this story received loads of attention in the media, TD finally agreed to release the inheritance to Lorette's brother.


If it's clear that bank drafts are risky - why would bank continue to use them?


Well, most banks are looking to drive profit.  Because bank drafts don't move money away from the bank instantaneously, interest will accrue during the time the funds sit with the bank.  When a person requests a bank draft, the money moves from the customer to the bank, but stays there until the recipient cashes the draft.  Even though requesting, sending and cashing a draft likely moves faster than a personal cheque, the bank is earning interest on the money in the time it sits with the bank.


In this electronic age - any form of paper transfer seems archaic - there must be a better way.


More information on this - click here.


A Better Alternative


An electronic transfer might be a better alternative.  Different from an Interac e-transfer with restrictive limits as previously mentioned, an electronic transfer can be used to move large sums of money quickly and securely, with the process (funds from the sender into the account of the receiver) taking roughly 2 to 3 business days no matter the distance between locations.


Yes, in some cases, electronic transfers can be more costly than a bank draft, but the funds move quickly, and most importantly prove to be a more secure method of transfer.


The only potential downfall is that more information is needed of the sender - specifically the details of their bank account.


To transfer funds using an electronic transfer, the recipient will usually need to provide the following information to the sender:


  1. The Bank's Name including address with city, province/state, postal code/zip code
  2. The Institution Number
  3. The Transit Number
  4. The Account Number
  5. And, the SWIFT or BIC Code when sending money overseas
    1. The terms SWIFT and BIC are synonomous.  As the names implies, the code is a Bank Identifier Code (BIC).  It usually consists of 8 to 11 characters - usually a mix of letters and numbers.


When sending a wire transfer, it's important to keep the receipt with the transfer details.  As large companies may receive multiple transfers per day, providing a copy of the wire receipt can help them distinguish your transfer from other transfers.  In addition, it can be helpful to let the recipient know that the transfer has been sent. 


Remember that an interac e-transfer is a great way of sending smaller sums of money, those $3,000 or so and less, but larger sums might be best sent as an electronic transfer.


The Bottom Line


Bank drafts are a good tool for ensuring the funds being sent are gauranteed, but risk being lost in transit.  In addition, bank drafts require little information about the recipient - making them simple.  For example, to request a bank draft, the payee (person or company name) is all that's needed.  When making an electronic transfer though, the specific details of the recipients bank are needed.  If you're looking to send a large sum of money, you might want to consider an electronic transfer, rather than a bank draft, through your bank.