Demand Deposit

Funds deposited in commercial banks' demand accounts.

Author: Kevin Henderson
Kevin Henderson
Kevin Henderson
Private Equity | Corporate Finance

Kevin is currently the Head of Execution and a Vice President at Ion Pacific, a merchant bank and asset manager based Hong Kong that invests in the technology sector globally. Prior to joining Ion Pacific, Kevin was a Vice President at Accordion Partners, a consulting firm that works with management teams at portfolio companies of leading private equity firms.

Previously, he was an Associate in the Power, Energy, and Infrastructure Investment Banking group at Lazard in New York where he completed numerous M&A transactions and advised corporate clients on a range of financial and strategic issues. Kevin began his career in corporate finance roles at Enbridge Inc. in Canada. During his time at Enbridge Kevin worked across the finance function gaining experience in treasury, corporate planning, and investor relations.

Kevin holds an MBA from Harvard Business School, a Bachelor of Commerce Degree from Queen's University and is a CFA Charterholder.

Reviewed By: Josh Pupkin
Josh Pupkin
Josh Pupkin
Private Equity | Investment Banking

Josh has extensive experience private equity, business development, and investment banking. Josh started his career working as an investment banking analyst for Barclays before transitioning to a private equity role Neuberger Berman. Currently, Josh is an Associate in the Strategic Finance Group of Accordion Partners, a management consulting firm which advises on, executes, and implements value creation initiatives and 100 day plans for Private Equity-backed companies and their financial sponsors.

Josh graduated Magna Cum Laude from the University of Maryland, College Park with a Bachelor of Science in Finance and is currently an MBA candidate at Duke University Fuqua School of Business with a concentration in Corporate Strategy.

Last Updated:October 26, 2023

What Is a Demand Deposit?

Demand deposits, sometimes known as non-confidential money, are funds deposited in commercial banks' demand accounts. When someone deposits money into a bank account, it becomes non-confidential money.

These account balances are typically regarded as money and make up the majority of a country's total money supply when measured using a restricted definition of the term.

Then, non-confidential funds are available without the depositor giving the bank prior warning. People utilize the money to cover regular costs, buy things, or handle financial catastrophes.

The daily limit of the bank or the limit established for that specific non-confidential money account, however, determines the most that a depositor may withdraw. 

Additionally, money put in a non-confidential money account typically earns low or no interest from banks or other financial organizations.

A demand deposit account, often known as a DDA, is a type of bank account from which customers can take their funds at any time and for any reason, without being required to give the bank any advance notice.

DDAs are just one of several types of accounts available at a financial institution such as a bank or credit union, where bank accounts are normally meant to assist you in saving, spending, or growing your money.

Different kinds of transactions may be permitted by these accounts. For instance, a DDA deposit—also known as a DDA credit— is a transaction in which money is added to the account. 

Debits of non-confidential money are transactions in which funds are removed from the account.

DDAs reduce the need to carry cash because the money is always available via a debit card, checkbook, or transfer. When compared to time deposit accounts, these accounts typically yield very little or no interest over the course of the year.

Checking and savings accounts are two types of DDAs that people commonly use. These accounts allow the use of debit cards to make purchases online or in physical places, withdraw cash from ATMs, and pay bills without informing the bank beforehand.

How Demand Deposits Work

DDAs are designed to be used when you require immediate access to your funds and are often provided by banks and credit unions. The Federal Bank Insurance Corporation (FDIC) insures the money in these deposit accounts up to $250,000.

According to the account opening balance criteria of some financial institutions, an individual would have to make an initial deposit in order to open your account. Others might charge a monthly maintenance fee or a minimum balance requirement.

DDAs, like many other types of bank accounts, can be owned solely by one person or jointly by two people. 

You can have both single ownership accounts and joint accounts at the same time because most banks don't limit the number of DDAs one person can possess.

While banks are permitted to pay interest on DDAs, it is uncommon for them to do so with checking accounts. Instead, opening a savings account increases your chances of earning interest.

Let's examine how this truly functions:

1. Deposits

In a non-confidential money account, you can deposit money and withdraw it whenever you want without informing the bank or credit union in advance. There are various methods for adding money to a DDA, including:

  • Depositing cash in the bank 
  • Directly depositing money into the account with a check
  • Use a mobile banking app
  • Adding a direct transfer to the account, such as a paycheck

2. Withdrawals

The majority of direct deposit accounts permit unlimited withdrawals by depositors. Certain DDA accounts, such as savings accounts, do, however, contain restrictions on particular transactions. As a result, if a depositor goes over the predetermined limit, their account could be terminated.

The following are the most typical methods for taking money out of a direct deposit account:

  • Using a check for payment
  • Online bill payment
  • Using a debit card to make a purchase
  • Using an ATM to make a withdrawal

Types of Demand Deposit Accounts (DDAs)

There are three primary categories of DDAs: savings accounts, checking accounts, and money market accounts. 

Checking accounts are the most frequent type. Each of these accounts has perks and cons, and the details vary between different banks or credit unions.

1. Checking accounts

The most prevalent kind of DDA is a checking account. It comes with a debit card as well as a checkbook, allowing you to access your funds whenever you need to pay bills, buy things in-store or online, paypal, withdraw cash, or do any number of other things.

Some banks provide specialized checking accounts, such as student checking accounts or senior checking accounts, for certain groups of account users, such as students or seniors.

Due to the low level of risk involved, checking accounts typically yield no interest or only a very little amount of money. The annual percentage yield (APY) that a bank or other financial institution pays on such accounts differs from one institution to the next.

2. Savings accounts

Another type of a DDA that is easily accessible to the general public is savings accounts. When compared to a checking account, the number of withdrawals that may be made from this type of account is often subject to greater restrictions than the number of withdrawals that can be made from a checking account.

The amount of time a depositor can take money out of their savings account is often capped at a certain number each month. 

The interest rates on savings accounts are typically higher than those on checking accounts; as a result, it is easier to increase your money more quickly if you have a savings account.

If an account permits more than six transfers or withdrawals each month, it cannot be considered a savings deposit account under Regulation D.

It's possible that the transaction limit will reduce the amount of money you have each month. If you go above this limit, you may be subject to penalties, such as a fee or the immediate conversion of your savings account into a checking account without prior notice

3. Money Market accounts

Money Market Accounts (MMA), also known as Money Market Deposit Accounts (MMDA), are not nearly as prevalent as conventional checking or savings accounts. A DDA that mirrors the interest rates of the market is called a money market account.

MMAs are designed to function similarly to a checking account but also accrue interest like a savings account would. 

They provide the ease of having your money accessible to you at all times by allowing you to use debit cards and checks, in addition to allowing you to earn some interest on your money.

The most important drawback of money market accounts is that, similar to savings accounts, they limit a maximum of six withdrawals every calendar month. To open a money market account with a bank, you could first be required to keep a minimum balance of several thousand dollars.

The interest rates offered by money market accounts change according to the overall market interest rates. 

Depending on the fluctuations in the market interest rate, the interest that is generated on MMAs could turn out to be higher or lower than what is typically earned on savings accounts.

Demand Deposit Advantages and Disadvantages

A bank account that enables the depositor to withdraw money on demand without notifying the bank is known as a non-confidential money account.

Due to the fact that they can be used to pay for goods and services as well as to settle debts through checks and drafts, they are frequently seen as a component of a broadly defined money supply.

Advantages are:

  • These deposits enable the depositor to immediately withdraw money from the account without giving the bank any prior notice.

  • If you have an account with a credit union, you can store your money securely knowing that it is protected by the National Credit Union Administration or the FDIC.

  • Joint owners are permitted on a single account with non-confidential funds.

  • DDAs make it simple for customers to obtain their money. Some types include writing checks, using an ATM, Net Banking, and bank teller.

  • An electronic transfer of non-confidential funds is permitted. We do not need to carry cash when we have DDAs.

  • The Federal Reserve takes non-confidential funds into account when calculating the money supply.

Disadvantages are:

  • There could be a mandated minimum or maximum balance that must be maintained on your account.

  • The interest rate on a demand deposit is oftentimes very low, if it exists at all. Banks, however, often impose monthly fees to maintain these accounts.

  • Return on Investment in these accounts are extremely low when compared to investments such as Treasury Bills and Business Paper. Many low-risk investments offer better returns than would be possible with non-confidential funds.

Demand Deposit Fees 

DDAs are known to yield little or no interest, however, there may be charges associated with opening one. There is no standard set of regulations or costs that apply across all commercial banks and credit unions.

The following are some instances of DDA fees:

  • Monthly maintenance fees
  • Overdraft fees
  • Fees for using out of network ATMs
  • Minimum account balance fees

The costs associated with checking and savings accounts are typically reduced or eliminated entirely for consumers banking with online banks. It's possible that the fact that online banks have lower overhead expenses than traditional banks with physical locations is a big part of the reason for this.

It's not always easy to determine which kind of bank account is going to be the most beneficial to your financial situation. DDAs are designed to make things easier for people who require quick access to their money. 

DDAs are made to allow you complete control over your spending without imposing restrictions or making you wait for a certain amount of time before the funds can be accessed.

The best convenience for quickly accessing or transferring funds is provided by demand deposits. They are therefore perfect for carrying out regular transactions and payments.

Demand Deposit vs. Term Deposit

DDAs give you immediate access to your money while earning you very little to no interest in return. Term or Time deposit accounts offer a guaranteed interest rate in exchange for the requirement that money to be kept in the account for a predetermined amount of time.

The certificate of deposit (CD) is the prime illustration of a time deposit account that most people are familiar with. 

When it comes to certificates of deposit (CDs), you often have the option of choosing between durations that are as short as 28 days or as long as 10 years, depending on what your bank or credit union offers.

If you want to earn interest on money you won't need anytime soon, putting it in a certificate of deposit may be a good option. CDs are widely regarded as secure investments because it is impossible to incur a loss of capital through their use unless the owner prematurely accesses their assets.

Demand Deposit vs. NOW Account

A bank may also provide a negotiable order of withdrawal account, generally known as a NOW account. After the Great Depression, NOW accounts were developed as a workaround enabling banks to continue to pay interest on checking accounts.

With NOW accounts, you must notify the bank in advance of any withdrawals. For instance, your bank can demand that you submit a written withdrawal request seven days before you intend to make one. 

It's crucial to be aware of this guideline even if banks may not always apply it to NOW accounts.

The amount of advance notice you would need to give the bank in order to access your funds is the key distinction between DDAs and accounts with negotiable orders of withdrawal.

NOW accounts circumvented Regulation Q by temporarily holding funds for a period of time, allowing banks to pay interest. 
Financial institutions are now permitted to pay interest on checking accounts after Regulation Q was removed in 2011, however NOW accounts are still in use.

Demand Deposit FAQs

Researched and authored by Shriya Chapagain | LinkedIn

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