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Pay-on-demand means a specific person or group has direct ownership of a financial instrument, while pay-in-exchange allows anyone in possession full financial control. Pay-to-order and pay-to-the-bar are common methods, while pay-less documents provide full legal and financial control over the terms within. Checks are the most common example of on-demand payment systems.
Pay-on-demand is a financial term that means that a single person, company, or group has direct ownership of a specific financial instrument. This means that the person or representative specified must be the person in charge of the transfer or dissolution of the document. This is in direct opposition to a pay-in-exchange document, which allows anyone in possession full financial control over the content. In modern finance, the most common payment-on-demand documents are personal and business checks.
Both pay to order and pay to the bar have been around since the early days of large-scale banking and commerce. Each of the methods has its own purposes and risks, giving each a strong presence to this day. These terms describe the basic way in which the final recipient of the payment document deals with the situation.
Pay less documents are the less common of the two. Using this method, ownership of a document provides full legal and financial control over the terms within. Originally these were used when the journey was longer and more difficult. The original issuer would not necessarily know who the person presenting the document to the payer would be. To avoid possible payment problems, the payee was left open.
The problem with that system usually revolves around theft or greed. Once the document changes hands, the ownership also changes. When the situation is less reliable, or the property cannot be secured, people use a pay-as-you-go system. This means that the document specifies a specific owner and possession has no legal significance.
The most common example of an on-demand payment system is a check; in fact, most checks say “pay to the order of” directly on them. When a check is written, the payer creates a document that says they owe a specific amount of money to a specific person or group. This document is a set of instructions that a bank will follow when presenting the check. A pay-demand check is a contract between the payer, the payee, and the bank. That’s why checks will often have three signatures when cashed; the payer, the payee and a stamp of the bank where the check was processed.
When one person cannot be present for a payment-on-demand transaction, it is possible to sign the document for another. The original owner specifies the new owner, signs the document, and delivers it to the new owner. On a check, this is usually done on the reverse side so a clear line of possession can be seen, but the same basic method can be used on any form of payment-on-demand document.
Smart Asset.
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