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A demand deposit is money deposited into a bank account with funds that can be withdrawn on-demand at any time.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 It offers the greatest liquidity, allowing cash to be withdrawn at any time.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.
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 difference between savings 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.
Why are demand deposits called so? ›
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.
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.
What is an example of a demand deposit? ›
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.
Can you withdraw money from 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.
What is the most common demand deposit account? ›
The most common types of demand deposits are checking and savings accounts offered by banks and credit unions.
What is the interest rate on a demand deposit? ›
You need to pay a penalty to liquidate your investment before maturity. The interest rate for a demand deposit lies between 4 to 6%, depending on the bank you choose to put the money in.
The most common types of demand deposits are checking and savings accounts offered by banks and credit unions. Lastly, demand deposits have several advantages, but their main drawback is that they earn little to no interest.
Are demand deposits equal to cash deposits? ›
Demand deposits include saving account deposits and current account deposits. These are called demand deposits as it is very liquid and can be used for purchase of goods and services immediately.
Is demand deposit a fixed deposit? ›
While demand deposit allows you to withdraw your deposit anytime you want, for fixed deposit there is a lock-in period before you are allowed to make the withdrawal.
How do banks use demand deposits? ›
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.
What is another name for 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.
What are demand deposit terms? ›
In simple terms, demand deposits are accounts through which you can withdraw money anytime you need without giving any prior application or notice. You must be familiar with some common demand deposit accounts like the checking account and savings account.
What is another name for demand deposit account? ›
Demand deposit accounts are also known as transaction accounts. The interest rates, fees, and minimum balance requirements for a demand deposit account vary from one financial institution to another.
Are demand deposits considered to a bank account? ›
Expert-Verified Answer. From a bank's perspective, demand deposits are considered a liability. Option A is the correct answer. Demand deposits are funds held by a bank that customers can withdraw on demand without any prior notice.
Are checking accounts also referred to as demand deposits or? ›
These are the amounts held in checking accounts. They are called demand deposits or checkable deposits because the banking institution must give the deposit holder his money “on demand” when the customer writes a check or uses a debit card.
What is the difference between bank money and demand deposits? ›
At its core, Demand Deposit is a type of bank account from which funds can be withdrawn at any time without any need to notify the bank in advance. It sharply contrasts with Term Deposits, which lock your money away for a predetermined period. There are two forms of demand deposits: Savings Account and Current Account.
