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What Is a Money Order and How Does it Work?

What Is a Money Order and How Does it Work?

It’s never been easier for Canadians to transfer money within Canada or abroad. The advent of e-Transfers has made it possible to send and receive money instantly to anyone with a Canadian bank account. If you need to send money to the US or another foreign country, services like PayPal, Wise, Visa Direct, and more make the process almost seamless.

With so many ways to move money electronically, it may seem like the old-fashioned money order no longer has a place in the payment system. While that may be true to an extent, money orders and bank drafts still serve an important purpose. This article will examine how money orders work, where you can buy them, and when they are useful. Are you ready? Let’s get started!

What Is a Money Order?

A money order is a physical form of payment, similar to a paper cheque. But money orders differ from regular cheques in that the issuer guarantees them. When a money order is purchased, the funds are immediately withdrawn from the purchaser’s account and secured in a special account by the financial institution issuing the money order. The recipient of the money order can rest assured knowing that the funds will be available when they cash the money order or deposit it into their bank account.

Money Orders vs. Cheques

Money orders and cheques have a few similarities: they are paper-based, contain a date, a payee, and can be negotiated by any financial institution. The primary difference is that with a regular cheque, payment is not guaranteed. Funds sufficient to cover the cheque must be available in the issuer’s account when the cheque clears. The issuer guarantees money orders because the funds have been paid in advance by the sender.

Money Orders vs. Bank Drafts

Some financial institutions refer to money orders as bank drafts, while others differentiate between the two, usually based on the cheque amount. For example, if the purchase amount is under $1000, it might be considered a money order, while anything above that amount requires purchasing a bank draft. All you need to know is that they are essentially the same thing.

What Is the Cost of a Money Order?

There is almost always a fee to purchase a money order, but it varies depending upon where you purchased it and the money order amount. Banks often waive money order fees for some service plans. I’ve included a list further down of money order fees at major Canadian financial institutions.

Where Can I Purchase a Money Order?

You can purchase a money order from any Canadian bank, as well as the following locations:

  • Canada Post post office
  • Credit Union
  • Western Union
  • Some Payday Loan Companies, i.e., Money Mart

To purchase a money order from a bank or credit union, you will likely need to be an existing customer with an active account. Below is a list of money order fees at several major Canadian financial institutions.

The Cost of Money Orders in Canada

Money orders and bank drafts vary in price at Canada’s financial institutions. Generally, credit unions charge less than the big banks for money orders (approx. $5 to $8). Banks are more expensive, at around $10. Most financial institutions offer free money orders and bank drafts with some bank account service plans.

Financial InstitutionMoney Order FeeDetails
TD Bank$9.99Free if you have a TD All-Inclusive Banking Plan or TD Wealth Private Banking Account
RBC$8.50Free with some bank account service plans
BMO$9.95U.S. Dollar money orders and drafts are available at no cost when purchased through a U.S. Dollar personal account
CIBC$9.95Free money orders and drafts for Seniors 65 and over (CIBC Smart for Seniors)
National Bank$9.00Free with some account service plans
Scotiabank$9.50CAD or USD; Free with the Ultimate Package
Vancity Credit Union$6.00 for members
$8.00 for non-members
Foreign drafts (other currency) are $7.75
Steinbach Credit Union$5.00USD/foreign drafts are available via Western Union
Meridian Credit Union $7.50
$11.00 for USD/foreign
Limited number free with some service plans

About Canada Post Money Orders

As I alluded to earlier, financial institutions are not the only businesses that issue money orders. A postal money order is a certified, cashable form of payment that’s guaranteed by Canada Post. You can purchase them at any post office in Canada. They are ideal as a substitute for sending cash in the mail, either for paying bills or sending money to loved ones. The price for a Canada Post Money Order is $7.50 and they can carry a maximum value of $999.99.

Canada Post Money Order Requirements

Anyone can purchase a Canada Post Money Order providing they meet the following requirements:

  • Must be able to provide the name or the payee and sender at the time of purchase
  • Have a valid piece of government-issued ID (for purchases of $3000 CAD or more)
  • Pay the $7.50 fee

When Canada Post prepares your money order, they will print the name of the payee on the cheque. This ensures that only the intended recipient can negotiate the money order and receive funds. You can cash money orders at any Canada Post location for no charge or at your bank. You can only cash post office money orders payable to a business at a financial institution.

Benefits of Sending or Receiving a Money Order

1. The funds are guaranteed. When you receive a money order from a trusted source, you can be comfortable knowing that the funds have already been removed from the sender’s account, and you will receive your money. Unlike a regular cheque, the sender doesn’t need to worry about maintaining the proper account balance until the cheque clears.

2. Safer than cash. While you certainly wouldn’t want to lose a money order, it’s safer than carrying large amounts of cash around. If you lose cash, it’s gone for good. If you lose a money order, you can usually obtain a replacement from the issuer. Policies and procedures for replacing money orders vary, depending upon the institution.

3. Money orders don’t expire. While regular cheques become stale-dated after six months, most money orders don’t expire. That’s part of what makes them “like cash.” The funds from a money order are secured in an internal account by the issuer until they are negotiated.

Money Order Drawbacks

1. Less convenient than other forms of payment. Money orders are paper-based, which means they need to be delivered to the recipient. If you want to send money to a family member who lives out of province, the only option with a money order is to send it via courier or snail mail, which can take several days. These days, there are far more convenient ways to send money; e-Transfer is one. If you need to send a larger sum, wire transfers are another form of secure, electronic payment.

2. Watch out for fraudulent money orders. There are fewer bank robberies nowadays, partly because criminals can get more money through cheque fraud with less risk of being caught. Every day victims of various scams, i.e., mystery shoppers, Kijiji, and romance scams, attempt to cash fake money orders and bank drafts without realizing the cheques are fake. Financial institutions must take every precaution to identify fraud, so Know Your Customer (KYC) and Know Your Transaction (KYT) precautions must be taken.

3. The cost. Money orders are more costly than other forms of payment. Canada Post charges $7.50 per money order. Most banks and credit unions charge $9.99 or more. Compare that to e-Transfers, which are included with many bank account service plans. Wire transfers, however, are still more costly than money orders.

4. You can’t post-date a money order. You can future date regular cheques, a convenient way to arrange payment for future expenses. A good example is writing cheques in advance for several months’ rent or paying for an upcoming school field trip. Money orders cannot be post-dated; they must be dated for the day they are purchased.

Will My Bank Hold Funds on Money Orders?

In the past, banks have not typically placed holds on money orders presented for deposit; after all, the funds are supposed to be guaranteed. Unfortunately, in this day and age, the prevalence of cheque fraud means that financial institutions have to be more cautious about the cheques they take in, including bank drafts and money orders. People often attempt to cash fake money orders, often unknowingly, through various scams.

Final Thoughts on Money Orders

Whether you are sending money in the mail to a family member or require guaranteed funds to purchase a big ticket item, it’s clear that the money order still serves a purpose as a form of physical payment.

Before you inquire with your bank about purchasing or cashing a money order, here are a couple of things to remember: with most financial institutions, money orders and bank drafts are the same things. In fact, most banks refer to them as bank drafts. Also, remember that while money orders are considered guaranteed funds, the prevalence of cheque fraud means that your bank may want to place a hold on your bank draft, at least until they can verify funds.

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