 Identifying
different means of payment
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 Dear
Dr. Don,
What is the difference between a money order,
cashier's check, certified check, traveler's check and bank draft?
Which one is the most secured method of payment? Thank you. --
Sandeep Selects
 Dear
Sandeep,
All of these methods of payment are a way of
involving a financial intermediary in the transaction to provide
some security and reassurance that the seller is receiving good
funds from the buyer. Transaction fees, guarantees, convenience
and security all factor into which is preferred as the method of
payment -- not just security.
Money order: Issued
by both financial and nonfinancial institutions, it is a financial
instrument that allows the named individual, or payee, on the order,
to receive the amount of cash specified on the money order. The
United States Postal Service explains the features
of its money orders on its Web site and should be used as a
benchmark when comparing other money order providers. The Bankrate
feature, "Phony
money orders cause increase 'holds' for all," discusses
how fraudulent money orders have made banks more cautious in accepting
these financial instruments.
Cashier's check: A
check drawn by a bank on itself, signed by a cashier or bank officer
and payable to a third party, named by the customer. An instrument
used to guarantee funds are available. There is usually a fee associated
with cashier's checks.
Certified check: A
check drawn on a bank account where a cashier or bank officer certifies
sufficient funds are available in the individual's account for the
check to clear. Funds in the account are earmarked to pay the certified
check upon presentation to the bank. A certified check differs from
a cashier's check in that the cashier's check is drawn on the bank's
funds and a certified check is drawn on the account owner's funds.
Bank draft: A check
drawn by the bank against funds deposited into its account at another
bank that authorizes that bank to make payment to the individual
named on the draft. A sight draft is payable on demand, whereas
a time draft is payable at some future date or payable under certain
circumstances.
Traveler's check: A
check issued by a financial institution in denominations like cash
that functions as cash, but the financial institution protects the
check holder against its loss or theft prior to its use in a transaction.
Unlike a money order, a traveler's check is cashed by the person
that purchased the check. Some issuers provide travelers checks
free of charge to existing customers. Otherwise, the individual
purchasing the traveler's check pays a commission on the purchase.
There are potential fraud issues with all of these
forms of payment. It falls to the seller of goods and services to
decide what form of payment he will accept, and what recourse he
will have in the face of fraud. The buyer, unless it's his intent
to defraud, is looking to exchange money for goods or services.
In selecting acceptable methods of payment for goods it is definitely
"seller beware." Of these methods of payment, the cashier's
check is my preference because it is the bank's check drawn on the
bank's funds.
I didn't discuss PayPal, wire transfers or other methods of electronic
funds transfer. But even a personal check, if the seller waits for
the check to clear before he releases the goods, can work as a secure
method of payment.
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