Accounts that allow people to withdraw money as and when required
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What is a Demand Deposit?
A demand deposit is money deposited into a bank account with funds that can be withdrawn on-demand at any time. The depositor will typically use demand deposit funds to pay for everyday expenses. For funds in the account, the bank or financial institution may pay either a low or zero interest rate on the deposit.
The maximum a person may withdraw can be up to a certain daily limit or up to the limit of their account balance. Common examples of demand deposits would be amounts in a checking account or savings account. Note that demand deposits are different from term deposits. Term deposits require depositors to wait a predetermined period before making a withdrawal.
Summary
- Demand deposits are accounts that allow people to withdraw money as and when required.
- They are important in consumer spending, as the funds typically hold the money used in day-to-day transactions.
- Common examples of demand deposits would be amounts in a checking or savings account.
Types of Demand Deposits
1. Checking account
A checking account is one of the most common types of demand deposits. It offers the greatest liquidity, allowing cash to be withdrawn at any time. The checking account may earn only zero or minimal interest since demand deposit accounts involve minimal risk. Interest paid may vary based on the financial provider.
2. Savings account
A savings account is for demand deposits held at a slightly longer duration compared to the short-term use of the checking account. Funds in the savings account offer less liquidity; though, for an extra fee, money may be transferred to the checking account.
Savings accounts often come with a minimum required balance. As larger balances are held for extended periods in a savings account, it pays a slightly higher interest rate than a checking account.
3. Money market account
A money market account is for demand deposits that follow market interest rates. Market interest rates are impacted by the central bank’s responses to economic activity. The money market account will, therefore, pay interest either more or less than a savings account, depending on how the market interest rate fluctuates. Traditionally, money market accounts offer a competitive rate to savings accounts.
Importance of the Demand Deposit
1. Consumer spending
Demand deposits are important in consumer spending, as they hold the funds used to pay for everyday expenses. The expenses may include groceries, transportation costs, personal care items, and more. Demand deposits are, therefore, advantageous due to their liquidity and ease of access.
With the on-demand feature of demand deposits, people can withdraw money at any time without the need to give the bank prior notice. Additional funds may be withdrawn from an ATM, debit cards, the bank’s teller, or through written checks.
2. Bank reserves
Demand deposits are important for institutions, as the total amount held in deposit accounts determines the bank reserves that must be kept on hand. Bank reserves are held in the vault or on-site at the bank and are essential in the case of large unexpected withdrawals.
The more money a bank holds in demand deposits, the more money it must keep in its bank reserves. The money not kept in bank reserves is called excess reserves. Excess reserves are then loaned out by banks, contributing to the money creation process.
3. Money supply
Demand deposits are an important part of the money supply of a country, defined within M1 money. M1 money consists of currency plus demand deposits. Demand deposits make up a significant part of the money supply in many countries.
During a financial crisis, many people together will make large withdrawals from the bank. The withdrawals will lead to a decline in demand deposits and a decrease in the money supply, with banks left with less money to loan out.
More Resources
CFI is the official provider of the global Commercial Banking & Credit Analyst (CBCA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional CFI resources below will be useful:
FAQs
What Is a Demand Deposit? A demand deposit account (DDA) is a bank account from which deposited funds can be withdrawn at any time, without advance notice. DDA accounts can pay interest on the deposited funds but aren't required to. Checking accounts and savings accounts are common types of DDAs.
Is a demand deposit the same as a checking account? ›
A demand deposit account is just a different term for a checking account. The difference between a demand deposit account (or checking account) and a negotiable order of withdrawal account is the amount of notice you need to give to the bank or credit union before making a withdrawal.
What is the difference between saving deposit and demand deposit? ›
Generally, savings have a limited maximum transaction value compared to demand deposits because demand deposit products are usually aimed at business needs and thus require a higher transaction limit. The next difference between savings and demand deposits lies in the disbursem*nt of money.
Are demand deposits really money? ›
Demand deposit accounts (DDAs) include savings, checking and money market accounts. They're often useful for everyday spending and paying bills. Money in these accounts can be withdrawn anytime without penalty (although some may charge a small fee for exceeding a set number of withdrawals per month).
What is the legal definition of a demand deposit? ›
(2) The term demand deposit also means deposits or accounts on which the depository institution has reserved the right to require at least seven days' written notice prior to withdrawal or transfer of any funds in the account and from which the depositor is authorized to make withdrawals or transfers in excess of the ...
What are the disadvantages of demand deposit? ›
Disadvantages of Demand Deposits
- Some financial providers charge overdraft fees or monthly maintenance fees.
- Savings accounts have a withdrawal limit.
- They offer little or no interest.
Demand Deposits
Funds a depositor may need to access at any time should be kept in a demand deposit account. Examples of demand deposit accounts include regular checking accounts, savings accounts, or money market accounts.
Why do people prefer demand deposits? ›
Offered by banks and credit unions, demand deposit accounts allow you to deposit to and withdraw funds immediately, whenever you want—"on-demand," in effect. The financial institution can't require advance notice or charge a fee for letting you access the funds. Ideal for frequent or everyday needs.
What is the advantage of deposit demand? ›
The advantages of a demand deposit are as follows: It ensures the safe deposit of funds in your bank account. You can withdraw quick cash to fulfil personal as well as business needs. These accounts are extremely liquid, allowing funds withdrawal anytime without seeking approval or serving any notice.
Why is it called demand deposit? ›
People deposit their savings in banks. They can withdraw their money whenever required. Because the deposits in the bank account can be withdrawn on demand, these deposits are called demand deposits.
With demand deposits, the interest rate risk is also manifested in the fact that changing interest rates could also affect customer behavior. For example, increasing market interest rates might lead to customers withdrawing money and seeking more profitable alternatives elsewhere.
What is the most common demand deposit account? ›
The most common types of DDAs are checking accounts and savings accounts.
Can banks accept demand deposits? ›
Activities That Can Be Performed By Payment Banks
It can accept demand deposits in the form of savings and current accounts. The money received as deposits can be invested in secure government securities only in the form of Statutory Liquidity Ratio (SLR). This must amount to 75% of the demand deposit balance.
What is another name for a demand deposit? ›
Demand deposits or checkbook money are funds held in demand accounts in commercial banks. These account balances are usually considered money and form the greater part of the narrowly defined money supply of a country.
Do demand deposits constitute money? ›
Answer: Demand deposits are considered as money because, They can be withdrawn anytime. They, at times, act as supplements for cash and cheque payments. These are a form of money in the bank.
Is demand deposit considered cash? ›
Cash includes cash on hand (e.g., petty cash) and demand deposits with financial institutions. ASC 230 defines cash as follows. Cash: Consistent with common usage, cash includes not only currency on hand but demand deposits with banks or other financial institutions.
Why is a checking account called a demand deposit? ›
Offered by banks and credit unions, demand deposit accounts allow you to deposit to and withdraw funds immediately, whenever you want—"on-demand," in effect. The financial institution can't require advance notice or charge a fee for letting you access the funds.
What are demand deposits considered as? ›
Answer: Demand deposits are considered as money because, They can be withdrawn anytime. They, at times, act as supplements for cash and cheque payments. These are a form of money in the bank.
What is the difference between a check and a demand deposit? ›
Demand deposit is the money that deposited by client into the bank and he has right to withdraw it at any given time thus it called demand deposit. While, Cheque is a paper instructing bank to pay specific amount of money from a person's account to a person whose name mentioned in the cheque.
