What Is a Drawee?
Let me explain what a drawee is—it's a legal and banking term for the party directed by a depositor to pay a specific sum to the person presenting a check or draft. You should know that the drawee plays a crucial role in banking and financial transactions. Banks and financial institutions are typical drawees. When you're handling bank transactions, the drawee is the intermediary that moves funds from the drawer's account to you.
Consider cashing a paycheck as an example. The bank cashing your check is the drawee, your employer who wrote it is the drawer, and you are the payee.
Key Takeaways on Drawees
You need to understand that a drawee serves as an intermediary in financial transactions, transferring funds from a drawer's account to a payee. In most cases, the drawee is a bank or financial institution holding the drawer's funds and fulfilling payment requests on demand.
Non-traditional entities, such as check-cashing services or payday loan shops, can also act as drawees, typically charging a fee. Even retailers accepting coupons function as drawees by honoring the funds promised by the coupon's issuer. While mainly linked to banks and checks, the term drawee applies to any situation where one party fulfills a financial obligation directed by another.
The Role of a Drawee in Financial Transactions
The drawee functions as a middleman in financial transactions, moving funds from the payer's account to the payee. Often, this is a bank managing the payer's funds, like when consumer banks deduct money from an account to pay a check.
Check-cashing services also handle drawee duties but usually charge a small fee. Companies dealing with money orders and wire transfers outside traditional banking can be drawees too—the money order acts as the bill of exchange, honored by the company when presented by the payee.
Remember, the drawer is the individual or organization writing the check or creating the bill of exchange, instructing the drawee to distribute funds to the payee.
Examples of Drawees Outside Banking
There are cases outside financial institutions where a party acts as a drawee, even informally. For instance, when you use a manufacturer's coupon, the store accepting it is the drawee, facilitating the transaction.
You present a document from the company, which is the drawer or payer. The store honoring the coupon is the drawee, and you, the customer, are the payee receiving the benefit. These transactions often don't involve direct cash to you, but they provide a discount, which might result in payment depending on regulations.
After using the coupon, the retailer claims funds from the issuing company, the drawer. This means no out-of-pocket loss for the drawee, similar to banks cashing checks, as funds come from the drawer's account.
Understanding the Parties in a Drawee Transaction
The three parties in a drawee transaction are the drawer, the drawee, and the payee. A payor, or drawer, is the one with the money issuing the check. The drawee honors the check and distributes funds to the presenter identified on it.
When a drawee receives a bill of exchange, it's an instruction to pay the presenter a certain amount. This happens daily in business, so you can confidently take a check to your bank and expect the funds to reach you or your account.
The Bottom Line
A drawee is fundamental in financial transactions, acting as the essential intermediary transferring funds from drawer to payee and ensuring transaction completion. Drawees aren't limited to traditional banks—they can include payday loan shops, money order companies, and retailers with coupons.
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