What Is a Bank Endorsement?

 A banker talks with a client.
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DEFINITION
A bank endorsement is a guarantee made by a bank that it will honor a payment agreement between one of its customers and a seller.

A bank endorsement is a guarantee made by a bank that it will honor a payment agreement between one of its customers and a seller. The endorsement assures the seller that the bank will fully back the financial obligation even if the customer cannot pay. 

Discover the primary purpose behind a bank endorsement, how it works, and when it may play an essential role in your finances.

Definition and Example of a Bank Endorsement 


A bank endorsement is a guarantee given by a bank or credit union. It ensures that the bank will fully back a negotiable instrument made by one of its customers in a third-party transaction.

Negotiable instruments are written documents that serve as a substitute for money when purchasing something, for instance, checks, bank drafts, promissory notes, and even certificates of deposit.

In the literal sense, a bank endorsement occurs when the bank stamps, signs, or uses some other form of authorization to guarantee that a negotiable instrument will be honored. So, in plain and simple terms, a bank endorsement is your bank’s promise to a seller that they will pay for something you purchased even if you can not. 

A bank endorsement signifies to a seller that a negotiable instrument will be honored when presented to the customer’s bank for collection, provided that all terms of the transaction agreement are met.

  • Alternative Name: Banker’s acceptance, time draft

Essentially, a banker's acceptance or time draft is a negotiable document where a bank unconditionally agrees to fulfill a payment obligation on behalf of the customer that created it.

Bank endorsements are common in international trade. For example, an importer may not want to pay an exporter in full before receiving goods and an exporter may not want to ship goods before being paid. So, as a solution, a bank serves as a middle party offering a guarantee to the exporter and accepting payment from the importer at a later date. 

How a Bank Endorsement Works 

A bank endorsement works when a customer creates a negotiable instrument, such as a check. Then the customer gets the bank to guarantee that the funds will be paid to the recipient when the check is presented. 

Bank endorsements are commonly used in delayed-payment agreements that involve international trade. The agreement is typically between a buyer and a seller who do not have a previous working relationship. In this case, the seller wants to guarantee that they will receive payment from a buyer they do not know.  

So when a buyer orders something from overseas that needs to be shipped, they may want to pay for the merchandise at a later date after receiving the shipment. In this situation, the seller would assume all of the risks if the buyer is unable to pay. So the seller could request that the buyer receive a bank endorsement from their bank. 

The buyer could then create a negotiable instrument through their bank known as a banker’s acceptance or time draft. Once the bank accepts and authorizes the draft, it is now fully backed by the bank. After the bank endorsement is obtained, the seller is then guaranteed payment. Additionally, the risks are transferred away from the seller and onto the bank.

A bank will not provide a bank endorsement unless it can verify that both parties are trustworthy.

Let’s look at a transaction that might require a bank endorsement. Imagine that you own a car dealership in the U.S. and want to purchase 500 cars online from a European wholesaler. You both agree on a price and that the payment will be sent via a check. However, since you don’t have a history with the seller, they may request you get a bank endorsement of the check. This guarantees the seller that they will receive payment for the cars whether you can meet the financial obligation or not.

Bank endorsement can also occur for domestic shipments within the United States. However, these trade-related endorsements are not used as often for international trade.

Types of Bank Endorsements

Banker's Acceptance

One type of bank endorsement is a banker's acceptance, also known as time draft. The time draft must be originated and accepted by the bank of the person creating the draft. The time draft acts as a written order that specifies whom to pay, how much, and what date. An authorized bank employee must then stamp the draft as “accepted” and sign it before the draft becomes the total liability of the bank. 

When a bank endorsement is structured using this process, the seller can ship the order with confidence that they will receive the payment on time. The buyer can also rest assured that the transaction will occur according to the agreed-upon terms. Ultimately, they won’t be assuming the risk that the buyer won’t pay.

Letter of Credit

Another type of bank endorsement is a letter of credit. The letter of credit works similar to the banker’s acceptance. The issuing bank guarantees a seller or exporter that they will receive payment for their goods if the buyer can not pay. 

If the seller agrees to this type of bank endorsement, the buyer, or importer, has their bank issue a letter of credit to the seller on behalf of the buyer’s bank. Then, once the goods have shipped, the seller can present their documents to the issuing bank and collect payment. 

Letters of credit are typically irrevocable unless all parties consent to cancel the agreement.

Stamp

Another form of bank endorsement occurs when a receiving bank stamps a check. The stamp is typically placed on the back. For instance, if you were cashing or depositing a check into your bank account.

A bank endorsement stamp is specific to the receiving bank. It typically includes a routing number, transit number, name and location of the bank, and the endorsement date. This type of bank endorsement leaves behind a digital and paper trail that can be traced should any issues arise with the cashing or proper posting of the check.

Key Takeaways

  • A bank endorsement is a bank’s guarantee that they will honor a financial obligation made by their customer even if the customer cannot pay.
  • Bank endorsements are commonly used with international trade agreements between buyers and sellers with no previous relationship.
  • A bank endorsement helps both parties feel confident they will have a trusted transaction.
  • Types of bank endorsements include banker’s acceptance, letters of credit, or endorsement stamps.

Article Sources

  1. Prominence Bank. “Bank Endorsement."

  2. Federal Reserve Bank of Richmond. “Instruments of the Money Market.”