DEPOSITS
There are four major types of deposits: demand deposits, savings deposits, hybrid checking/savings deposits, and time deposits. What distinguishes one type from another are the conditions under which the deposited funds may be withdrawn.
A demand deposit is a deposit that can be withdrawn on demand at any time and in any amount up to the full amount of the deposit. The most common example of a demand deposit is a checking account. Money orders and traveler’s checks are also technically demand deposits. Checking accounts are also considered transaction accounts in that payments can be made to third parties—that is, to someone other than the depositor or the bank itself—via check, telephone, or other authorized transfer instruction. Checking accounts are popular because as demand deposits they provide perfect liquidity (immediate access to cash) and as transaction accounts they can be transferred to a third party as payment for goods or services. As such, they function like money.
Savings accounts pay interest to the depositor, but have no specific maturity date on which the funds need to be withdrawn or reinvested. Any amount can be withdrawn from a savings account up to the amount deposited. Under normal circumstances, customers can withdraw their money from a savings account simply by presenting their “passbook” or by using their automated teller machine (ATM) card. Savings accounts are highly liquid. They are different from demand deposits, however, because depositors cannot write checks against regular savings accounts. Savings accounts cannot be used directly as money to purchase goods or services.
The hybrid savings and checking account allows customers to earn interest on the account and write checks against the account. These are called either negotiable order of withdrawal (NOW) accounts, or money market deposit accounts, which are savings accounts that allow a maximum of three third-party transfers each month.
Time deposits are deposits on which the depositor and the bank have agreed that the money will not be withdrawn without substantial penalty to the depositor before a specific date. These are frequently called certificates of deposits (CDs). Because of a substantial early withdrawal penalty, time deposits are not as liquid as demand or savings deposits nor can depositors write checks against them. Time deposits also typically require a minimum deposit amount.
A demand deposit is a deposit that can be withdrawn on demand at any time and in any amount up to the full amount of the deposit. The most common example of a demand deposit is a checking account. Money orders and traveler’s checks are also technically demand deposits. Checking accounts are also considered transaction accounts in that payments can be made to third parties—that is, to someone other than the depositor or the bank itself—via check, telephone, or other authorized transfer instruction. Checking accounts are popular because as demand deposits they provide perfect liquidity (immediate access to cash) and as transaction accounts they can be transferred to a third party as payment for goods or services. As such, they function like money.
Savings accounts pay interest to the depositor, but have no specific maturity date on which the funds need to be withdrawn or reinvested. Any amount can be withdrawn from a savings account up to the amount deposited. Under normal circumstances, customers can withdraw their money from a savings account simply by presenting their “passbook” or by using their automated teller machine (ATM) card. Savings accounts are highly liquid. They are different from demand deposits, however, because depositors cannot write checks against regular savings accounts. Savings accounts cannot be used directly as money to purchase goods or services.
The hybrid savings and checking account allows customers to earn interest on the account and write checks against the account. These are called either negotiable order of withdrawal (NOW) accounts, or money market deposit accounts, which are savings accounts that allow a maximum of three third-party transfers each month.
Time deposits are deposits on which the depositor and the bank have agreed that the money will not be withdrawn without substantial penalty to the depositor before a specific date. These are frequently called certificates of deposits (CDs). Because of a substantial early withdrawal penalty, time deposits are not as liquid as demand or savings deposits nor can depositors write checks against them. Time deposits also typically require a minimum deposit amount.