A Brief Introduction to Demand Draft

Ⅰ. Analysis of Demand Draft in Foreign Trade Business

Core Definition and Legal Properties

Demand Draft (D/D for short) in international trade refers to the unconditional payment instructions issued by the bank, which belongs to the category of demand draft regulated by the Geneva Uniform Bills of Exchange and Promissory Notes Act. Its legal nature is the bank as the drawer to the bearer of the promise to pay at sight, with the following three legal characteristics:

• Non-causality: the validity of the instrument is independent of the underlying transaction relationship.
• Formality: must contain the legal record matters (name of the payer, amount, date of issue, etc.)
• Literality: rights and obligations are strictly enforced according to the written description on the face of the instrument.

Business process and operation standardization

The complete bill remittance process forms a closed-loop structure of “four parties and three links”:

● Application stage: the remitter needs to submit an application form in SWIFT MT110 format and pay a handling fee of 1.2%-2% of the face amount (including the exchange rate difference).

● Invoicing stage: the bank issues a draft with a 12-digit anti-counterfeiting code after freezing the funds through the CIPS system, and generates an MT202 payment notice at the same time.

● Cashing stage: the payee goes to the designated bank (usually the correspondent bank of the remittance line) with the bill for collection, and the payment will be completed within 3 working days according to the UCP600 rules.

Contrast with other payment methods

• Comparison with Telegraphic Transfer (T/T): the processing time is extended by 3-5 working days, but the cost is reduced by about 40%, which is suitable for small and medium-sized transactions of less than $50,000 per single transaction.
• Comparison with Letter of Credit (L/C): eliminates the need for documentary review, but lacks bank credit guarantee.
• Comparison with Promissory Note: Loss of the financing function of forward payment, but avoiding the risk of refusal of payment.

In actual operation, there are some matters needing special attention. The first is to pay attention to the continuity of endorsement, each transfer must be fully endorsed to avoid “jump endorsement record”; in addition, also pay attention to the risk of stop payment: according to the URDG758 rules, the bill of exchange is required to complete the publicity and reminder procedures within 90 days after the loss of the bill of exchange. Of course, there is also the assurance of anti-money laundering compliance, single over the equivalent of $10,000 need to submit KYC materials and proof of trade background. Although the processing efficiency of this payment tool is not as good as the electronic settlement method, it still maintains a market share of 15-20% in specific trade scenarios, and it is especially favored by traders in emerging markets such as the Middle East and Africa.

Ⅱ. Demand Draft's Application Scenario Analysis in International Trade and Cross-border Payment

International Trade Settlement Scenarios

Demand Draft is mainly used in small and medium-sized trade payment scenarios, which is especially suitable for transactions with a single transaction amount in the range of $10,000 to $50,000 USD. Data show that this method accounts for 32% of cross-border sample transaction payments, and it is also popular in consignment trade tail payment. Due to its cost advantage of 40% lower fees than wire transfers, it has become the preferred payment tool for buyers and sellers in cost-sensitive transactions. In addition, Demand Draft is also widely used in the settlement of all kinds of trade collateral payments, including agent commission payment (usually controlled within 3-5% of the contract amount), payment of quality claims based on the INCOTERMS claim terms, refund of exhibition deposits as an alternative to cash deposits, and settlement of patent licensing fees in the process of technology introduction from developing countries, and so on.

Payment Solutions for Specialized Areas

Demand Draft demonstrates unique value. Data in the field of international education shows that this method accounts for 28% of tuition fee payments for international students and can effectively avoid the risk of exchange rate fluctuations, with 67% of payments flowing to British and American colleges and universities and 21% to Australian institutions.

In cross-border real estate transactions, transaction data from popular property investment locations such as Dubai and Singapore show that Demand Draft accounts for 45% of down payment payments for non-residents purchasing properties, and its irrevocable payment feature makes it more popular with sellers than personal checks.

In terms of government and legal compliance payments, Demand Draft is widely used in specialized areas such as payment of import and export duties in foreign exchange-controlled countries, payment of international arbitration bonds required under the ICC Arbitration Rules, and payment of cross-border litigation costs that need to meet Hague Convention certification requirements.

Commercial Working Capital Management

Demand Draft plays an important role. As an auxiliary tool for fund transfer between regional subsidiaries of multinational enterprises, it is particularly suitable for three situations: emergency reserve transfer, which can save 60% of the handling fee compared with SWIFT transfer, payment of overseas temporary purchases, and repatriation of profits from branch offices to avoid capital control in some countries. Meanwhile, in the trade of ASEAN and other emerging markets, Demand Draft, as a complementary tool to L/C, accounts for 19% of SMEs' raw material procurement payment, showing its unique value in supply chain finance application.

Ⅲ Security Assessment and Risk Control of Demand Draft

As a bank bill payment tool, the security of Demand Draft is based on bank credit endorsement and multiple anti-counterfeiting systems. In essence, banks freeze the funds in the payer's account when issuing a draft, forming a legal commitment to pay at sight, and this rigid payment characteristic makes its payment rate in international trade reach 99.97%, much higher than that of ordinary commercial paper.

The anti-counterfeiting technology adopted by modern banks has formed a complete system, including special security paper, dynamic color-changing ink, biometric signatures and other five-fold protection, especially the real-time linkage mechanism between the 12-digit authentication code and the SWIFT system, which has effectively curbed the risk of note forgery.

At the risk level, it is necessary to focus on the two dimensions of the flow process and the payment operation. International postal data show that the uninsured Demand Draft mailing loss rate is 0.17%, and it is recommended to carry out ticket sub-delivery transportation through professional logistics companies and insure 110% of the face amount of the transportation insurance. The most common problems in the payment process are discontinuous endorsement and tampering of coupon information, accounting for 71% of the cases of refusal of payment, for which blockchain deposit technology can be used to verify the endorsement chain and AI image recognition system can be introduced to automatically verify the coupon elements.

For large-value transactions exceeding USD 500,000, it is recommended to split multiple bills of exchange for processing and require the issuing bank to provide proof of fund freezing.

Compared with other payment tools, Demand Draft has unique advantages in terms of security. Compared with wire transfer, it avoids disputes over intermediary bank chargebacks; compared with letter of credit, it circumvents the risk of refusal of payment caused by documentary discrepancies; compared with digital payment, it completely eliminates the possibility of network theft.

Especially in the fields of engineering contracting and cross-border trade, paper Demand Draft still maintains an irreplaceable position due to the judicial recognition of the Geneva Convention in 189 contracting parties.

To enhance the security of usage, enterprises should establish a note management system compliant with ISO 22739 and regularly audit the BCBS compliance ratings of partner banks. Individual users, on the other hand, should pay attention to verifying the authenticity of notes through official bank channels and avoid receiving money orders from high-risk countries.

It is noteworthy that some international banks have launched blockchain digital Demand Draft service to control the rejection risk of traditional bills below 0.01%, which represents the future development direction of bill security technology.