A deposit account is any amount of money put into a bank or other financial institution that is set up to remain in the institution for a fixed period of time. Most deposit accounts earn interest determined by the amount on deposit and the length of time. Some deposit accounts allow limited withdrawals, usually earning you less interest for the privilege or charging fees for the service.
Following the banking panics of the 1890s and early 1900s, the government sought to restore confidence in the banking industry by creating the Federal Reserve System. The system was to oversee and lend money to banks in the event that their cash reserves were threatened by bad investments or other situations that could create panic and lead to their collapse.
In fact, the next major banking panic in 1933 saw the collapse of 4004 banks and was not prevented by the Federal Reserve System. However, when the Federal Reserve System merged the weaker banks into less numerous but stronger banks and repaid depositors approximately 85% of their losses, confidence was restored and the industry moved forward.
In June of 1933 the Federal Deposit Insurance Corporation was created by then President Franklin Roosevelt. The purpose of the FDIC was to collect fees from member banks in exchange for insurance policies guaranteeing depositor accounts up to the then-astronomical sum of $2,500.00 each. Many banks opposed the new system but the agency was created and laws were passed giving it the muscle necessary to be effective. Within a few years of its creation most of the nation’s 19,000 banks and financial institutions were members.
With firm guarantees backed by the Federal government, deposit accounts started to grow in popularity. And as they grew they began to change to keep up with a growing country, new technology and an influx of money.
Technically speaking, when a customer deposits $100 into a bank account he surrenders his ownership of that money in exchange for a receipt stating that the bank now owes him $100. The bank then lists the $100 in its “cash on hand” assets and simultaneously creates a liability note for the same amount linked to a deposit account, checking account or other account opened by the customer.
Depending on the type of deposit account opened, withdrawals may only be allowed with severe penalties, allowed on a limited basis or allowed without limitations.
Time deposit accounts exist when funds are deposited for a fixed amount of time, earn a fixed amount of interest for the period and are not available for withdrawal during the term. Banks prefer these accounts because they are then free to loan the funds out to other customers without having to worry about giving funds back to the initial depositor upon demand. Traditionally, no additional deposits are allowed to be made into time deposit accounts until after the initial term has expired. These accounts are typically referred to as CD’s or certificates of deposit.
Savings accounts are slightly different than time deposits. They do earn interest but withdrawals and deposits are not only allowed but encouraged. Typically they earn less interest than a time deposit due to the fact that the funds are available (“liquid”) to be withdrawn upon the demand of the customer provided all deposits have cleared through the banking system. While checks and credit cards are normally not linked to savings accounts, in a growing number of cases debit cards now are.
Demand accounts exist mostly for the convenience of the customer who has instant access to his funds via debit cards, checks, online transactions or in-person withdrawals. They are mostly used for people to go about their lives, shop, pay their bills, deposit their paychecks and have access to their funds. And because of this access, banks charge higher fees for the service.
With ever increasing technology, all of these accounts are starting to converge. Some demand accounts are looking more and more like time deposits while some time deposits are starting to emulate some features of demand accounts. With the advent of online banking and instant global transfer of funds, people are able to make instant, independent decisions concerning their financial desires. In response, banks and other financial institutions are offering more options to their customers.