Why old-fashioned bank drafts could leave you on the hook for big bucks

Bank drafts are touted as a secure means of payment. But if they're lost, stolen, altered or damaged, it's often not the bank that has to replace them. It's the person who bought the draft. So why do people still use them?

System makes money for banks, but electronic transfers would be faster with less risk for customers

Ian Camacho found out the hard way that his lost $17,475.57 US bank draft could not be cancelled or replaced. But TD Canada Trust eventually refunded the money. (Ian Camacho)

Ian Camacho was stunned when he saw the CBC News story about a couple's struggle to convince TD Canada Trust to replace a lost $846,000 bank draft.

He was even more astounded when he read that TD, after the story drew international attention, backed down and released the couple's inheritance. 

That's because Camacho, 63, a retired former COO of an investment brokerage — and a former risk manager at TD Securities — had pretty much the same experience when he was disbursing money from his late brother's estate.

Camacho spent months trying to get TD to cancel a bank draft he bought for $17,475.57 US that he figured was lost in the mail when it never made it to his cousin in Singapore.

"I bought [bank] drafts for everybody, thinking drafts are about as safe an instrument as you can get," Camacho said.

Although TD Canada Trust eventually refunded Camacho's money, the issue demonstrates how poorly bank customers understand bank drafts.

Here are some important facts.

Not as safe as you might think

While bank drafts are sold by banks as a secure means of payment, if they're lost or stolen or altered or damaged, it's often not the bank that's on the hook to replace the money. It's the person who bought the draft.

And since bank drafts are often used for large sums of money, people who lose them can be out a lot.

In Camacho's case, the bank requested a deposit equal to the amount of the draft, locked in for three years, and wanted him to sign an indemnity, he said. If the lost draft was cashed, "they would draw down on my deposit," Camacho  said.
TD Canada Trust apologized in December to an Ontario family and released more than $846,000, hours after CBC News reported that their original bank draft had been lost by UPS. Lorette and John Taylor had spent 10 months trying to recover the family inheritance. (Petar Valkov/CBC)
This isn't just the case with TD. Royal Bank states on its website, "RBC is not able to cancel or stop a bank draft. If lost or stolen, a replacement or refund will need to be requested, and a bond of indemnity may be required from the purchaser."

It's also not just the case in Canada. The financial ombudsman of the U.K. says, "Unlike a cheque, a genuine banker's draft cannot be stopped, even if it is lost or stolen."

The question is, why?

TD says it's because bank drafts never expire.

"When you're deciding how to transport it or deliver it, you should treat it like cash," TD spokesperson Cheryl Ficker said

So how do bank drafts work?

"Bank drafts are essentially cheques on a bank's account in another bank," says David Weiman, a professor of economics specializing in banking at Barnard College, an affiliate of Columbia University. "So a bank will hold what we call a correspondent balance in another bank, and it can write cheques on that."

Why can't you cancel a draft?

So if a bank draft is essentially a cheque, shouldn't you be able to cancel it like a personal cheque or even a certified cheque?

"That's mystifying to me," says Weiman.

"What's the difference between a bank and me? As customers of the bank, why can't they cancel? There may be something in the contractual relationship between the banks that makes those transactions different, but that I can't tell you. It just doesn't seem plausible."

But perhaps an even better question is: Why are we still using any paper instrument that has to be transported physically, sometimes by a third party, to the payee?

Trillions of dollars are moved around the world with the touch of a button every day. Businesses including banks have been moving away from cash and paper toward electronic transactions because they're cheaper, more efficient, faster, and more secure.

And yet paper persists. 

How the float helps banks

Perhaps one of the best reasons banks still rely on paper drafts is that they help banks do what they're best at: make money.

Because a draft is not electronic, the transfer of funds is not instantaneous. 
Apple Pay, shown on an iPhone 6 in 2015, is one of many forms of instantaneous electronic transactions. But slow. old-fashioned paper forms such as bank drafts make money for banks, says economics professor David Weiman. (Mike Blake/Reuters)

In addition to the time it takes to get the draft to the person receiving the money, when they go to cash it, banks will often put a hold on it for three to five days. 

"It takes a certain amount of time for these to be cleared and actually settled." says Weiman.

"In the meanwhile, of course, those funds still reside in the bank on which it was drawn. So they can continue to collect interest." he says.

Weiman said banks are aggregating millions of dollars, even if they earn an annual rate of one per cent.  

"It still adds up," he said. "And that's occurring every day."

The time between when a payment is made and the funds received is called the float.

A long-standing source of revenue

The float has been a source of revenue since the days when everything was done on paper and sent through old-fashioned mail, Weiman says.

"It was not uncommon for businesses to actually keep accounts or even banks to keep their correspondents [accounts] at out-of-the-way locations, because it would take longer to actually move the paper around to the appropriate destination so the money would stay tied up in float for longer periods of time."

Those floats earned interest the entire while.

The float is even more lucrative in the case of unclaimed bank drafts.

The Bank of Canada says those are treated the same as an unclaimed balance in a bank account.

After 10 years, if there has been no activity and the owner can't be contacted, the balance is turned over to the Bank of Canada. 

That didn't happen with Camacho. After CBC News contacted TD about his situation, the bank replaced the money from the lost draft.

A happy ending

"We've reached a resolution to this situation with our customer,"  said TD's Ficker in an email.

"To help our customers understand more about bank drafts, we've published information on our TD Newsroom."

Camacho says he still had to sign an indemnity promising the original draft wouldn't be cashed. But he didn't have to put up a deposit. 

"I was given a refund yesterday by TD and wired the funds (free of charge) to my cousin in Singapore, and she received the money this morning," he said.

And it will be electronic wire transfers from now on, he says. His days of using bank drafts are over.

About the Author

Aaron Saltzman

Senior Reporter, Consumer Affairs

Aaron Saltzman is CBC's Senior Reporter for Consumer Affairs. Tips/Story ideas always welcome. aaron.saltzman@cbc.ca twitter.com/cbcsaltzman