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What Is a Drawee?
“Drawee” is a legal and banking term used to describe the party that has been directed by a depositor to pay a certain sum of money to the person presenting a check or draft written by the depositor. The drawee is a key entity in banking and financial transactions. Banks and financial institutions are examples of drawees. For individuals conducting bank transactions, a drawee is the intermediary that transfers funds from a drawer’s account to them.
An example of the role of a drawee involves cashing a paycheck. The bank that cashes your check is the drawee, the employer who wrote the check is the drawer, and you are the payee.
Key Takeaways
- A drawee acts as an intermediary in financial transactions, transferring funds from a drawer’s account to a payee.
- In typical scenarios, the drawee is often a bank or financial institution that holds the drawer’s funds and fulfills payment requests on demand.
- Non-traditional financial entities, like check-cashing services or payday loan shops, can also serve as drawees, usually charging a fee for their services.
- Beyond banks, retailers accepting coupons function as drawees, facilitating the transaction by honoring the funds promised by the coupon’s issuer.
- Although primarily related to banks and checks, the term drawee can apply in any situation where one party is responsible for fulfilling a financial obligation directed by another.
The Role of a Drawee in Financial Transactions
The drawee acts as a middleman in a financial transaction. Its role is to move funds from the payer’s account to the payee.
Often, the drawee is a bank that manages the payer’s funds in an account. Consumer banks often do this by taking money from an account to pay a check.
Check-cashing services also perform the duties of a drawee but normally require a small fee to complete the transaction.
Money order and wire transfer companies outside traditional banking can also be drawees. The money order functions as the bill of exchange that when presented by the payee is honored by the company that received the funds from the payer.
Important
The drawer is the individual or organization that writes a check (or creates a bill of exchange) that instructs the drawee to distribute funds to the payee.
Examples of Drawees Outside Banking
There are instances outside of financial institutions where a party may be considered a drawee, if only in an informal sense.
For example, when a customer uses a manufacturer’s coupon, the store accepting it acts as the drawee. It is the entity facilitating the transaction.
The customer presents a document created by a company that is the drawer or payer behind the coupon. The store honoring the coupon is the drawee. The customer is the payee, or person who receives the coupon’s benefit.
Most of these transactions don’t involve a cash exchange with the customer. However, because money is funded as a discount on the total cost, a transaction may result in an actual payment, depending on various regulations governing such activity.
After the coupon is used, the retailer can claim funds from the issuing company, the drawer. This leads to no actual out-of-pocket loss on the part of the drawee, just as for financial institutions cashing a check, because the funds are ultimately removed from the drawer’s account.
What Are the 3 Parties in a Drawee Transaction?
The three parties to a transaction involving a drawee are the drawer, the drawee, and the payee.
How Does a Payor Relate to a Drawee?
A payor, or drawer, is the person with the money who issues a check. The drawee is the entity that honors the check and distributes funds to the person who presents, and is identified by, the check.
What Happens When a Drawee Receives a Bill of Exchange?
A bill of exchange represents instructions to the drawee to pay the person presenting it with a certain amount of money. This type of transaction occurs every day in the normal course of business. That’s why you can walk into your bank with a check written to you and can rest assured that you or your account at that bank will receive those funds.
The Bottom Line
A drawee is important to and fundamental in financial transactions, acting as an essential intermediary that transfers funds from the drawer to the payee and ensures the completion of a financial transaction. Drawees can be entities other than traditional banking institutions, such as payday loan shops, money order companies, and retailers accepting coupons.
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