Nothing in the world is free; whenever you receive something, you must give something in return. This is the law of nature.
The truth is that the concept of transfers is often discussed these days. With the advancement of international communication and the expansion of economic relations, transfers are becoming increasingly important. But the main question is: aren’t humans exchanging money with each other? So, what role does a transfer play in this context?
The fact is that both transfers and money fall under the realm of economic transactions, and their uses are similar, but they have many differences.
In this article from Hafez Exchange, we aim to explore what a transfer is and how it differs from money. Stay with us.
What is Money?
From the beginning of civilization, humans realized that to maintain peace and harmony, if they wanted to receive something from someone, they needed to give something in return. This principle formed the basis of what is known as “barter.” In the past, if you were a blacksmith, you would receive fabric from a cloth seller in exchange for the metal goods you prepared.
The problem arose when you needed something other than fabric, such as rice. If the cloth seller didn’t have rice and offered you fabric instead, you would have to give fabric to a rice seller in exchange for rice. But what if the rice seller wanted wooden items and had no need for fabric?
The barter system was so flawed and inefficient that humans quickly thought of inventing money. Money (which initially appeared as coins made of gold, silver, and bronze) was a unit of legal value that you could use to pay for goods. With this invention, people no longer needed to directly exchange goods or services; instead, they received money, which could be used to purchase any goods or services they wanted.
Money essentially served as an economic intermediary for transactions. As human civilizations advanced, the concept of money evolved, and people realized that they didn’t necessarily need valuable objects (such as gold or silver coins) to create money; a piece of paper with official government backing could serve the same purpose.
Thus, gold and silver transitioned from being currency to becoming commodities themselves. In essence, money is the most basic form of a transfer!
Also read: The reasons for the increase in the price of the dollar
What is a Transfer?
In the past, trade caravans were often attacked by bandits and robbers, and all the money and coins of the caravan owner would be looted. Merchants developed various methods to hide and protect their wealth from these robbers, but they were never fully successful in safeguarding themselves. The damage from direct money transfers was so high that they needed to consider an alternative solution.
The idea that revolutionized the global economic system was the creation of transfers or bills of exchange. Merchants decided that instead of carrying money directly, they would seek the help of trusted individuals in cities. For example, before a journey, a merchant would give 100 coins to a trusted person in City A and receive a letter from them stating, “So-and-so has given me 100 coins in City A, and you should deliver the same amount to them in City B on my behalf.”
This practice gradually led to the establishment of a financial communication system between different cities. With this method, merchants no longer had to carry money themselves and risk robbery; instead, they would leave it with a trusted person and receive a transfer in return. Upon reaching their destination city, they would present the transfer and receive the equivalent amount of money.
The transfer system gradually expanded and became a profitable business. Transfer agents realized that they could charge merchants a fee for handling money and issuing transfers. During seasonal periods, transfer agents would gather, reconcile the money received and given, and settle any minor debts and credits among themselves.
As you can see, a transfer is essentially a financial and credit document that can be cashed elsewhere, eliminating the need to carry cash. In other words, a transfer is a financial credit document and a tool for transferring debt from one person to another.
History and Uses of Transfers in Financial Transactions
Many historians believe that the system of transfers was invented by Arab merchants. These high-ranking merchants, who undertook numerous long journeys through dangerous routes, successfully used this system to mitigate the risk of bandit attacks. Gradually, this innovation spread to Europe, and transfer acceptance and issuance centers were established in cities like Italy and Constantinople.
However, transfers have an even older history. In Iran, during the Achaemenid period, there were documents known as “bills of exchange” that functioned similarly to modern transfers. Stone tablets from the reign of Cyrus the Great clearly show that these bills of exchange were common in ancient Iran. Therefore, the origins of the transfer system can be traced back to ancient Persia.
Advantages of Using Transfers
The invention and widespread use of transfers revolutionized global economic systems and significantly boosted trade. The main advantages of using transfers include:
- Elimination of Direct Money Transport: The primary and most important advantage of transfers is that they eliminate the need for individuals to transport money directly and face the associated risks. With transfers, your money is protected from theft, damage, loss, or misplacement during transit.
- Increased Transaction Security: Essentially, transfers enhance the security of transactions and reduce the likelihood of theft or robbery. Transfers are sometimes used among traders as a form of currency. In this case, you transfer your bill of exchange to another person, who then redeems it for themselves instead of you.
- Facilitated Transactions: Transfers simplify economic exchanges and help stimulate trade by making the process more straightforward and efficient.
- Hassle-Free Storage: Managing and transporting a few pieces of paper is certainly much easier and safer than handling millions or billions in cash.
- Creation of Money: Transfers are fundamentally based on money but rely on credit. A transfer is essentially a credit document for which you receive payment. Without credit assurance, a transfer would be worthless. This allows individuals to secure more credit and, based on this backing, increase their business production and profits. Consequently, the creation of money within economic systems rises.
Disadvantages of Using Transfers
Although transfers offer many advantages and create significant opportunities for economic growth in global markets, they are not without their drawbacks. Alongside their positive aspects, transfers also have some potential negatives, which are outlined below:
- Risk of Forgery: Although this problem has decreased significantly today, the risk of forgery still exists. The biggest issue with transfers is that they can be forged. While forging a million dollars in cash would require creating 10,000 individual $100 bills meticulously, you could achieve the same result by forging a transfer document (which is actually simpler than cash).
- Lack of Backing: Often, transfers are exchanged between private entities that do not have a strong backing. This raises the risk of fraud. Therefore, you should be cautious when issuing and receiving transfers and not trust just any entity.
- Potential for Fraud: Transfers can easily become tools for fraud. There is a possibility that the transfer you receive may lack the necessary credibility, and the issuer may not have sufficient funds to cover the transfer at its destination.
- Payment Delays: Redeeming transfers may not be instantaneous. In reality, redeeming a transfer often depends on public holidays, business hours, available funds, and other factors, which could result in delays.
- Associated Costs: To utilize transfers and enjoy their benefits, you must pay a small fee as a transfer fee.
- Devaluation Over Time: Currency values fluctuate daily, so if transfers are redeemed late, they might not retain their original value. This is especially true for foreign currency transfers.
Types of Remittances
Today, remittances have become broadly defined and are one of the most important tools in the economic system. The advantages of remittances or drafts have led to various types emerging and finding diverse applications. Here are the main types of remittances in Iran:
Stock Remittance
Interestingly, transactions on the stock exchange are also carried out through remittances. During an initial offering, individuals and legal entities pay an amount of money to receive a document of ownership for a specific number of shares. This document is essentially a remittance because it represents your ownership of a percentage of a company’s shares in exchange for the money paid to the stock exchange.
One of the most important reasons for stock market transactions being based on remittances is the fluctuating value of company shares. The property of remittances is that their value changes with fluctuations in currency value. Therefore, when you purchase shares for, say, 1 million tomans, if the company is profitable, you can sell it a few days later for double the price (2 million tomans) or half the price (500 thousand tomans).
Also read: What services do currency exchange offices offer?
Foreign Remittances
Foreign remittances are arguably one of the most important types of drafts. Their primary purpose is to replace the need to carry cash abroad. Given the significant restrictions on international cash transfers (you cannot currently take more than 5,000 euros in cash out of the airport), foreign remittances have played a crucial role in foreign transactions.
International trade is fundamentally based on foreign remittances. Additionally, many people need to send money abroad before emigrating or send money to relatives living in other countries. In such situations, using foreign remittances is one of the best (perhaps the only) available options.
The mechanism of a foreign remittance closely resembles its original purpose. It involves an economic base in the origin country with financial and economic credibility. Individuals deposit their money at this base and receive a remittance in return. They can then cash this remittance at a branch of the same institution in the destination country. However, for issuing and cashing a remittance, the institution in the destination country does not necessarily need to have a direct branch; it can also establish connections with other reputable bases.
The primary institutions for issuing foreign remittances are banks and exchange offices. The main international services these economic units provide include the issuance and settlement of foreign remittances. In a foreign remittance, you can also choose the recipient. You deposit the money with the bank or exchange office, and in a few days, the person you have designated can receive the equivalent amount in another currency in the destination country.
Another feature of foreign remittances is the conversion of international currencies. Due to the differences in monetary units between countries, foreign remittances are the only direct means of financial transactions. During the foreign remittance process, currency conversion occurs. You deposit the equivalent amount in local currency to the bank or exchange office, and they provide the equivalent amount in dollars (or any other currency) to the recipient in the destination country.
In addition to banks and exchange offices, several international money transfer systems like Western Union, PayPal, MoneyGram, and others also have legal and formal backing for issuing and sending foreign remittances. However, these financial institutions have many restrictions and are subject to sanctions in Iran.
Given the international sanctions against Iran, there are no banking transactions between our country and the rest of the world. Additionally, other financial systems have also imposed sanctions on us. In this situation, the only legal and reliable base for issuing and sending foreign remittances is reputable exchange offices such as Hafez.
Bank Cards
When you deposit money into a checking account and receive a credit card in return, you essentially get a remittance for your money. Consider the mechanism of bank cards: when you use the card to make a payment, you are not directly giving money to the seller. Instead, by swiping the card through a machine, you are instructing the bank to transfer a portion of your available credit to the seller.
In other words, the bank’s debt to you is transferred to the seller, and now the bank owes money to the seller. The bank will then deposit the amount into the seller’s account within a specified time frame. Thus, with a bank card, you are effectively spending your credit remittance rather than physical cash. One of its key features is that the amount can be adjusted in real-time, unlike fixed remittances.
Interestingly, the advent of bank card technology has also led to the phenomenon of machine-based remittances! Nowadays, ATMs are essentially machines that deduct from your remittance credit in the bank account and provide you with physical cash in return.
Even more interesting is that paper money itself can be considered the simplest form of remittance, as it is just a piece of paper with its value printed on it. For example, the value of a 5,000-toman banknote is exactly what is printed on it. The total value of these pieces of paper represents our wealth. Without the backing of the central bank, banknotes would just be pieces of paper.
Participation Bonds
Participation bonds are documents issued by the government to attract investment from the public. They are essentially remittances that represent the government’s and central bank’s debt to you. By redeeming them at a bank, you can receive cash equivalent to their current value in rials.
Purchase Vouchers
Another common type of draft is purchase vouchers that companies or organizations provide to their employees. The mechanism of purchase vouchers works as follows: a company or government entity deposits a sum of money with a store through prior collaboration and, in return, receives several small vouchers.
These small vouchers are then given to employees, allowing them to make purchases at various branches of the store equivalent to the value of the voucher. Essentially, these vouchers are documents indicating your ownership of a certain amount of money, which is only valid at that particular store.
Purchase vouchers effectively replace cash and are highly profitable by creating financial credit for the company and the store.
Insurance Policies
Insurance companies are also institutions that use vouchers. An insurance company collects a monthly or annual premium from you and, in return, provides you with vouchers in the form of a booklet. When visiting a doctor, laboratory, or hospital, you can pay part or all of the medical expenses using these vouchers instead of cash.
Letter of Credit
Another type of draft is a Letter of Credit. Letters of Credit are primarily used in large international transactions and are considered a form of guarantee. Under a Letter of Credit, a bank acts as a guarantor between the two parties involved in the transaction (buyer and seller). The bank, as the transaction’s trustee, assures the buyer that it will not release their money to the seller until the goods are fully delivered.
These documents are used mainly for large-scale trade and significant economic transactions and are considered a type of draft. In this setup, the buyer receives a document of ownership in exchange for the money deposited with the bank (instead of directly paying the seller), and the bank provides the voucher to the seller upon confirmation of the transaction.
However, in these transactions, the bank only guarantees the receipt of the goods and does not ensure their quality, leaving room for potential fraud. For example, a seller might deliver empty boxes to the buyer, receive a receipt, and obtain the voucher from the bank. In such cases, the bank does not guarantee the quality of the transaction but ensures its completion.
Pre-Sale Car Vouchers
Pre-sale car vouchers are a common phenomenon in Iran. The semi-public nature of car production in Iran has led major car manufacturers to sell vouchers instead of cars. In this system, by paying a sum of money, you receive a voucher in place of the car. This voucher is a document indicating that you have paid a certain amount for purchasing a specific car from a particular company, even though the company has not yet manufactured your car.
In this system, the voucher is used to generate capital. In other words, the company first receives the money from the customer for production and then delivers the product. The credit created in the process provides the necessary capital for the company’s production and also results in a lower purchase price compared to the open market (this explanation goes beyond the advantages and disadvantages of the system).
Interestingly, these car purchase vouchers themselves have become a tradable commodity and are bought and sold among people!
Differences Between Drafts, Checks, and Promissory Notes
It is important to note that checks and promissory notes are modern forms of drafts, but they have some general differences, which are outlined below:
- To issue a check, you need a checkbook, and for this purpose, you must open a checking account. However, such a requirement is not necessary for drafts. To issue a bank or foreign draft, you do not need to have a special account with a particular bank or sufficient credit to obtain a checkbook. Instead, you can present any amount of cash to the bank or exchange house (or deposit it into an account) to have your draft issued.
- A criminal complaint can be filed for a check. In other words, if your account balance is insufficient or empty when the check is deposited, the recipient can legally sue you and even obtain an arrest warrant. However, criminal complaints cannot be filed for drafts and promissory notes; they can only be pursued through civil means.
- Checks can only be issued and processed through recognized banks, and non-bank institutions cannot issue checks. In contrast, besides banks, other reputable economic entities (such as exchange houses) can also issue drafts.
- Checks can be issued in bearer form, which is legally permissible, but drafts cannot be issued in bearer form.
- Checks generally have a specific validity period and include a due date, while drafts can be held for an extended period and cashed whenever desired.
Also read: AI forecast for Cardano price until July 31, 2024.
Frequently Asked Questions
How much does it cost to issue a draft?
In general, economic entities that issue drafts will charge you a fee for this service. Some institutions have fixed rates for issuing and sending drafts, while others operate on a percentage basis. They may charge a small percentage of the total amount as a fee, either settling it separately or deducting it from the total amount.
The fee for issuing foreign drafts is a bit more complex, as it involves not only the issuance and delivery costs but also the exchange rate for converting currencies.
Who can issue drafts?
Both individuals and legal entities can issue and send drafts. Unlike checks, it is not only banks that handle drafts; government agencies, international money transfer systems, financial and credit institutions, and of course, exchange houses also offer draft issuance and sending services.
When choosing an exchange house for sending a foreign draft, be very careful and select a reputable, experienced, and officially licensed entity, such as Hafez.
Is it possible to endorse a draft?
Yes, you can endorse a draft by signing it on the back, thereby transferring it to another person.
What is a Digital Draft?
In digital drafts, instead of using paper documents, digital banking and financial systems are used to send the draft. Most foreign drafts are of this type. The transfer speed in digital drafts is much faster and the security is higher.
Final Thoughts
The most significant difference between a draft and cash is how they are transferred. Cash is a formal unit for exchanging goods and services, while a draft is a document of ownership of a certain amount of money, held by a trusted individual or institution. The essence of a draft is to allow individuals to access their funds anywhere in the world with just an accredited paper, without the need to transport large amounts of cash and carry banknotes.
There are many types of drafts, with foreign drafts being among the most important. These drafts, issued and sent by reputable banks or exchange houses such as Hafez, are essential for international financial transactions and are the only fast and logical way to send or receive money to/from abroad.
In this article, we aimed to define drafts in simple terms. We hope this information has been useful to you.
