Business, Legal & Accounting Glossary
A checking account is an account at a depository institution against which checks may be written to make payments. For the consumer checking account, payment can also often be made via debit card. The bank, thrift, or credit union that maintains the checking account will generally send an account statement each month. Checking account balances usually pay very little or no interest. In the US, the FDIC insures checking account balances up to $100,000 per individual. Banks are required to meet a reserve requirement for all checking account deposits by depositing money with the Federal Reserve, typically in the form of vault cash. Checking account balances are also counted in the narrow definition of the money supply known as M1.
A deposit account which is held at a bank or financial institution by individuals/business entities (account holders), offering them secured and swift access to funds on demand, through a variety of different channels, is called as transactional account or checking account.
Transactional accounts are not meant for savings’ purposes or earning interest, but for providing convenience to business or personal clients and therefore such accounts do not bear interests. As a matter of fact, a transactional account holder can deposit or transfer any amount of money from banks, depending on the availability of funds.
A transactional account is also referred to as a checking account (or chequing account), mainly in North America. In the United Kingdom as well as in Hong Kong, India and some other countries, this account is called a current account or cheque/check account.
Since the money deposited under this account can be withdrawn at any time, it is therefore sometimes called as demand account or demand deposit account (DDA), except for “NOW accounts” in the U.S.- which are technically different.
During the early 1500s, The Netherlands used to be major trading and shipping centre of the world. Those institutions or individuals who had acquired a large amount of cash through businesses used to deposit their money with “cashiers” in order to safeguard their wealth. These cashiers held cash for fees. However, the number of cashiers increased so did the competition. As a result, cashiers started providing hosts of other services to attract clients, including the paying out services to any person bearing a written order from a depositor to allow withdrawing money. The cashier kept a note as payment proof.
Gradually, the idea spread in other countries such as England and some English colonies in North America. In Boston, landowners started mortgaging their lands to cashiers who in turn provided an account against which they (landowners) could write checks.
Later in the eighteenth century, the word “cheque” appeared for the first time that were preprinted and carried serial numbers on the. At the end of the eighteenth century, problems arising out of clearing checks, (sending them from one bank to another for collection) paved the way for the development of clearinghouses.
A transactional account holder is able to make or receive payments through the following channels:
However, there are certain services that are only country-specific. For Instance;
Most Commonly Used Means BY Transactional Account Holders
Branch Networks: These are physical locations where customers are offered numerous banking and financial services, such locations are called as branches. Usually, a branch will offer its clients’ a combination of cash machines (Automatic Tailoring Machines), telephone banking, counter services and financial advice.
Internet or Online banking helps viewing balances and statements through the bank’s secure website, in addition to performing transactions and payments, and various other facilities. Online banking is extremely useful, particularly for banking outside bank hours and banking from wherever an internet connection is available. As the use of internet penetrated more and more with the passage of time, most retail banking institutions started offering access to current accounts via online banking.
Overdrafts: In North America, an overdraft facility is available to checking account holders (It is an optional service). The account holder can either apply for an overdraft facility or the bank its own discretion can decide to offer this service temporarily at an ad hoc basis, including the maximum amount which can be withdrawn.
Earlier in the United States, Regulation Q (12 CFR 217) and the Banking Acts of 1933 and 1935 (12 USC 371a) barred a member of the Federal Reserve system from paying interest on demand deposit accounts.
Previously, this ceiling was often circumvented by either creating an account type such as a Negotiable Order of Withdrawal account (NOW account) which is legally not a demand deposit account or by offering interest-paying checking through a bank which is not a member of the Federal Reserve System. Later, the Dodd-Frank Wall Street Reform and Consumer Protection Act, both of them legislated by the Congress and signed into law by President Obama on July 21, 2010, revoked the statutes that forbids interest-bearing demand deposit accounts, effectively repealing Regulation Q (Pub. L. 111-203, Section 627). The abolishment of these accounts took effect on July 21, 2011. Since that date, financial institutions have been allowed, but not obligated, to provide interest-bearing demand deposit accounts.
High-interest NOW accounts are widespread throughout the industry, currently. They offer a higher interest rate than typical NOW accounts and often act as loss-leaders to drive relationship banking.
In 2003, banks and credit unions started creating maximum balance accounts, which give a premium rate up to a certain limit and a lower rate on balances above that limit. This new trend (banks had typically established minimum account balances rather than maximum account balances) developed very quickly as it made possible for financial institutions to attract multiple customer relationships at the same time as limiting the interest expense associated with each account.
The first maximum balance or high-interest checking account was accessible in 2003 through a small community bank in New Mexico, Pioneer Bank. Later in 2004 and 2005, several community banks in West Texas implemented the idea, and a 3rd party vendor, BancVue, combined the maximum-balance concept with the notion of a higher yield for customers who opt for specific cost-savings behaviours, as a “Reward” Checking account.
Looking at success, other banks also followed. By 2010, over 1.5 million REWARD Checking(r) accounts had been opened at BancVue’s clients alone.
The abolishment of Regulation Q, which earlier barred the payment of interest on standard transactional accounts, took effect too recently for it to have shown major changes on banking practices. It is possible, however, that as time passes by, the popularity of these alternative “checking” accounts will fall as clients choose for the less restraining rules governing standard transactional accounts.
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This glossary post was last updated: 15th April, 2020 | 59 Views.