First, some background on the changes to the Uniform Commercial Code (UCC). The UCC is a comprehensive set of laws governing commercial transactions in the United States, providing guidelines that regulate the transfer and rights of personal property. In 2022, the governing body of the UCC created new rules–enumerated in Article 12 of the UCC–that recognize the existence of digital assets and create a legal framework for ownership of digital assets. For a more technical analysis of UCC Article 12 and the form factor of digital drafts, check out this paper written by our friends at Nyca Partners.
How Digital Drafts Work: The user journey for digital drafts looks something like this:
Creation: A payor clicks “send money” on Fin3’s platform, which initiates a digital draft. Fin3 moves the amount of money for the payment into a segregated bank account and creates an entry in the ledger used to track DDs.
Notification: The payee is notified of the incoming payment by text or email. The payee can choose to cash out immediately or at a later date, as funds are already secured in a bank account.
Verification: Upon accepting the payment, the payee verifies their identity and inputs their payment instructions.
Settlement: The funds are then transferred directly into the payee's account.
There’s a lot of technical detail behind the scenes that we are happy to go into if you’d like to learn - feel free to reach out! But it’s important to share two key takeaways on why digital drafts are special: the ownership of digital drafts is legally protected by the UCC, and the money is held in a bank account for the benefit of the payee. This creates several benefits for users:
Speed: Digital drafts are delivered by text or email. I can send you a digital draft in milliseconds, and you don’t have to wait for the mail carrier to deposit a letter in your inbox.
Security: Fin3 has configurable security layers. A payor can choose what type of security measures they want the payee to go through - anywhere from no checks at all to full ID verification, anti-fraud checks, video recording, etc. Much more on this later because payment fraud is a huge problem, and it’s only getting worse (think about AI doing voice payment scams!).
Cost: Digital drafts cost less than a stamp. The direct costs of writing and cashing checks can be up to $3, and the indirect costs (your time and effort to process checks) can be higher.
Control: Fin3 gives payors real-time visibility into the status of a digital draft; e.g., has a payee picked it up, has they payee initiated/completed cashout, etc. Transparency = power and peace of mind.
Privacy: In the digital draft model, the payor doesn’t have to collect the payee’s bank information. In this age of scams and privacy laws, paying with a digital draft means you don’t have to hold sensitive financial data - the payee inputs it themselves.
Integration with digital systems: There are endless possibilities for what can be done with digital drafts. You can make them conditional based on a specified event - for example, the DD activates on a certain time (think pre-dated rent checks that go live on the 1st or the 10th of the month), or DDs that don’t activate until the title of an asset transfers to the seller. We will save this for a future date for more discussion, but there are all sorts of future use cases that go way beyond checks.