A Comprehensive Guide to Understand How Demand Deposit Works

Offered by credit unions and banks, demand deposit allows you to withdraw funds immediately, as, and when you want. A financial institution will not require advance notice and will not charge fees for gaining access to funds. An ideal choice for everyday and frequent needs, DDA’s usually take the form of savings or checking accounts. 

Key Takeaways

• DDAs or Demand Deposit Accounts allow the withdrawal of funds from a financial institution at any point in time. 
• Demand deposits provide funds for daily purchases and expenses. 
• Demand deposit accounts pay no or little interest, given the trade-off for the funds being readily available for the investor. 
• The demand deposit account can have joint account owners. 

What is a Demand Deposit?

What is the right way to define demand deposit? When it comes to demanding deposit, a demand deposit or a Demand Deposit Account is a bank account from which the deposited funds can be easily withdrawn without advanced notice. DDA accounts can pay interest on the funds that are deposited but are not required to. Both savings accounts and checking accounts are common types of DDAs. 

Source: https://m.rbi.org.in/scripts/BS_ViewMasDirections.aspx?id=10296

Features of Demand Deposit

Some of the most important features of demands deposits are as follows:

• You can have access to withdrawing money whenever the financial institution pays a slight interest

• You can have a joint account wherein either of the account owners can both withdraw and deposit

• A few financial institutions set a minimum balance limit for the demand deposit accounts

• Funds can be interest-bearing and are payable on demand

• There are no specific eligibility requirements set in place for demand deposit accounts 

• There is no limit to the number of transfers and withdraws that can be made and no maturity period as well 

The Working of Demand Deposits

The working of demand deposits can be understood as follows:

• Let us consider a situation where the depositors will be required to notify the financial institution before the withdrawal of funds. This would be quite a challenge in terms of obtaining cash and making mundane transactions. This is in contrast to what a demand deposit example would be. 

• Demand deposit accounts are set in place for the instant provision of money, i.e. the funds people need in order to make a purchase or pay their bills. 

• The demand deposit account holding can be accessed at any time, wherein the account holder/owner can simply walk to an ATM or go online and withdraw the money they need. 

• As long as the DDA holds that sum, the financial institution must pay that amount to the account holder. It can be, therefore, said that the money is available ‘on demand’. Hence, the name demand deposits. 

• Demand Deposit Accounts are typically offered by credit unions and banks, in contrast to the investment account offered by the financial service firms and brokerages. While these funds are perhaps invested in assets that are highly liquid, the holder of the account must still notify the financial institution that they wish to withdraw a sum of money. 

• Depending upon the asset in question, it can take a day or two to make the sale of investments and the cash available. A Demand Deposit Account can typically mean a ‘direct debit authorization’, which is the withdrawal from an account to purchase a good or service. This is what happens when you choose to use a debit card. It is fundamentally the very same concept. The money is instantly available, drawn on the account linked for solely your use.  

• Both the joint owners of a DDA must sign when opening an account. However, only one owner must sign when closing an account. Either of the owners can sign checks and withdraw funds without the other owner’s consent. 

• Some financial institutions create a minimum balance for DDAs. Accounts falling behind the set minimum value are charged a fee each time the balance drops below the desired value. Some banks, however, offer no minimum balance and monthly fees. 

Types of Demand Deposit

Regarding the types of demand deposits, primarily, DDAs are checking accounts, but they can also include savings accounts. MMAs (Money Market accounts) are also a type. However, MMAs are somewhat in the grey area because some financial authorities categorize them as DDA, and some do not. 

• Checking account

A checking account is the most common form of a demand deposit account. It offers a significant amount of liquidity and allows for the withdrawal of cash at any point in time. The checking account is a demand deposit example and can earn a minimum rate of interest as a demand deposit account involves a lower risk. However, based on the financial provider, there could be a difference in the rate of interest paid. 

• Savings Account 

A savings account is for the demand deposits that are held for a slightly longer term as compared to a checking account. Funds in this type of demand deposit account have a lower liquidity. The money can be transferred to a checking account for extra fees. These types of accounts usually have a minimum balance amount to be maintained as a large amount is kept for a longer span of time. It, therefore, pays a higher interest rate as compared to the checking account. 

• Money Market Account 

This account is for demand deposits that follow that market interest rate. The central bank’s response to economic activity impacts the market interest rate. Therefore, the MMA pays either more or less interest rate on a savings account based on the fluctuations in the interest rate. Conclusively, the interest rate of this type of account is competitive with a savings account. 

Did you Know?

Being an owner of the demand deposit account, you have the authority to write a cheque as and when required.  

How to Open a Demand Deposit Account?

The steps to open a demand deposit account are simple and can be understood as under:

• Compare your options, i.e., compare the rate of interest offered by different banks.s

• Gather the important documents required like:

1. Social Security number
2. Documents for address proof
3. Documents for identification such as the passport or the driver’s license

• Choose an individual or a joint account and fund it. 

• Submit the application and set up online banking for the same. 

Requirements for Demand Deposit Account

The sole requirements of DDAs are no limitations when it comes to making withdrawals and transfers.

• There is no set lockup or maturity period and no eligibility requirements.  

• The payment of the amount of interest rate on DDA can vary as per the individual institution.
• A number of financial institutions got around that rule via the Negotiable Order of Withdrawal. 

• DDAs come with low interest rates, on a savings account, and they may also charge fees for the handling of the account. 

Word to Remember

Negotiable Order of Withdrawal

NOW or a Negotiable Order of Withdrawal is an interest-earning type of demand deposit account. A consumer with this type of account can write drafts against the money held on a deposit. This type of account is also known as a ‘NOW account’. 

Conclusion

When it comes to demand deposit accounts, the funds are readily available, always. The funds can either be withdrawn in the form of cash or paid using the online transfer facility or a debit card. This happens without giving a bank notice or incurring a paying fee/penalty. DDAs offer the utmost convenience for the transfer of funds and getting cash to another party or account. 

FAQs

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