A drawee in banking is the entity that has been asked to pay a sum of money to a person who presents a check or a similar financial instrument. If your employer (the drawer) were to write a check to you (the payee), the bank would be the drawee.
Knowing the definition of drawee can help you understand banking and legal terminology, which can help build your financial literacy. Read on to learn more about what a drawee in banking is.
Key Points
• A drawee is the entity, often a bank, that provides a sum of money to a payee presenting a check or similar financial instrument.
• The drawee relationship involves three parties: the drawer (payor), the drawee, and the payee.
• The drawee plays a crucial role in facilitating financial transactions, especially check cashing or depositing.
• The drawee helps manage risk by holding funds before releasing them, ensuring the check clears.
• Drawees often assume primary liability for errors or mistakes on checks they accept for payment.
Understanding Drawees
While the term drawee is not one that is often used by people, it plays a crucial role in the finance industry. Understanding what a drawee is can help you if you ever receive or write checks.
Definition of a Drawee
The definition of a drawee is a person or company (often a bank or other financial institution) that has been directed to pay someone presenting a financial instrument — often a check. The person presenting the check is usually referred to as the payee, and the payor (or drawer on a check) is the person who issued the check.
Role in Banking Transactions
While the term drawee may be relatively obscure, it plays a key role in banking transactions. Without a drawee as an intermediary, it would be much more difficult, or perhaps even impossible in some cases, to cash or deposit a check. When you deposit or cash a check, the drawee is the one that contacts the payor (or their bank) to withdraw the funds to give to you.
Without a drawee, you would have to contact the payor’s bank directly to receive your funds. This might or might not be successful.
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Drawee in the Context of Checks
While the concept of a drawee does exist in other areas besides checks (most notably in coupons presented to a retail store), it is most commonly used in banking when someone writes a check.
If you receive a check and try to cash it or deposit the check into an account such as a high-yield checking account, the bank or check-cashing service where you present the check will serve as the drawee. They will manage the transaction, contacting the individual or company that wrote the check (or their bank) to help facilitate the transfer of funds.
Importance of the Drawee
A drawee can be very important in helping to ensure the easy and quick transfer of funds between people or companies with accounts at different banks.
Facilitating Financial Transactions
One of the most important roles of a drawee is in helping to facilitate financial transactions, such as sending money between accounts. Whether using online or traditional banking, one of the most common bank transactions is moving money to someone else at a different account (such as by writing checks). A drawee plays a crucial role as an intermediary in this process.
Risk Management
A drawee can also help with risk management. Since it usually serves as an intermediary, it can help to lower the overall risk of the check writing process. It’s common for a drawee to be a bank, and these financial institutions usually will hold onto funds for a couple days before releasing them. This process (you may know it as waiting for a check to clear) helps to lower the overall default risk of the transaction.
Legal Implications
With a drawee as an intermediary in the process of writing and depositing a check, you as the payee are generally not liable for errors or mistakes on the check. When a drawee accepts a check for payment, they are often considered primarily liable for any errors, omissions, or mistakes on the check.
Rights and Obligations of the Drawee
When a drawee accepts a check for payment, they take upon themselves the obligation to honor any valid checks that are presented. They also do have the right to return what are known as dishonored items (such as if the payor’s account has non-sufficient funds). The drawee also assumes primary liability for any errors, omissions or mistakes on the check when it is presented. This is why banks or other financial institutions will generally make sure to review a check before they accept it and pay out any funds.
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The Drawee Relationship
There are three main actors in the drawee relationship — the drawee and the drawer of a check (sometimes referred to as the payor), along with the payee.
Relationship With the Drawer
The person who writes a check or other financial instrument for payment is commonly referred to as the drawer (sometimes also called the payor). The drawer includes their routing and account number on the check before giving it to their customer as payment for an item or service. These routing and account numbers help the drawee to facilitate the transfer of money from one account to another.
Relationship With the Payee
The person who presents a check to a drawee for payment is usually referred to as the payee. It is common (though not required) that the payee have a checking account or other relationship with the bank that is serving as the drawee. This can help to mitigate the risk for the drawee, since they have a contact they can reach out to in case there are any errors with the check as it was presented.
It’s also worth noting that you can often cash a check at the bank it was drawn on, without having an account there but by providing appropriate ID (and the bank verifying that the funds are available).
Intermediaries Involved
If the drawer of a check has an account at a different bank than the one that is serving as the drawee, there may be other intermediaries involved in the process. One of the most common networks of financial institutions is the Automated Clearing House (ACH), but there are other similar networks as well. These intermediaries help the drawee to facilitate the process of cashing or depositing a check.
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The Takeaway
A drawee is one of three important actors in certain types of financial transactions, most commonly when a check is written and deposited or cashed. The drawee is usually a bank that accepts a check or other financial instrument and pays out the money. The payee is the person who presents the check for payment, and the payor or drawer is the person or entity that wrote the check. While the term drawee is fairly uncommon in everyday speech, drawees play a crucial role in the process of transferring money between people with accounts at different banks.
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FAQ
What is the difference between a drawer and drawee in banking?
In a financial transaction, the drawer is the party (such as an employer) that directs the drawee to transfer funds to a payee. The drawee is the entity (such as a financial institution) that actually distributes a specified sum to the recipient. So if you did a freelance gig and were paid by the Acme Company, that business is the drawer, and the bank that cashes the check they gave you is the drawee.
What is the role of the drawee?
Usually, the drawee is the entity that facilitates a transfer between a drawer (or payor) and payee. In many situations, the drawee is the bank or check-cashing service involved in cashing or depositing a check that a drawer provides to a payee.
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