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What is a demand deposits in Canada

02.07.2021
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8 min.

The idea of a demand deposit is to hold funds in an account and they may be withdrawn from it at any moment at the depository institution. For example, a current or savings account available via a cashier, ATM, or online banking.

What is a demand deposits in Canada

People put their savings in banks. The money can be withdrawn at any moment.

Note! Since deposits in a bank account can be withdrawn on demand, these deposits are called demand ones.

Types of demand deposits

Current account

This is one of the most widespread types of on-demand deposits. It provides maximum liquidity by allowing you to withdraw cash at any time. With a current account, only zero or minimal interest can be earned because demand deposit accounts are associated with minimal risks. The percentage paid might vary depending on the financial service provider.

Savings account

It is intended for call deposits held for a bit longer time period than the short-term use of the current account. Less liquidity is offered by savings accounts, however, for an additional fee, it is possible to transfer funds to a current account.

These accounts frequently require a minimum balance. As savings account hold larger balances for a long time they pay a bit higher percentage rate rather than current accounts.

Money market account

The account is for demand deposits following market percentage rates. These rates depend on the central bank's response to economic activity. Thus, interest paid by money market accounts could be higher or lower than that of savings accounts and it is based on fluctuation of the market percentage rate. Typically, money market accounts provide competitive rates for savings ones.

The significance of demand deposits

Consumer spendings

Demand deposits play an important role in consumer spending as they contain funds used to pay for day-to-day expenses. They can include groceries, travel expenses, hygiene items, etc. Thus, demand deposits are beneficial due to their liquidity and ease of access.

Thanks to this demand deposits feature customers can withdraw funds at any moment without previous notice to the bank. Additional funds might be withdrawn from debit cards, ATMs bank tellers, or written checks.

Bank reserves

Such deposits are essential to banking institutions as the total in deposit accounts specifies the bank reserves that must be held available. Bank reserves are held in the bank or vault and are necessary for the event of large unexpected payments.

The more money a bank keeps on demand deposits, the more funds must be held in the bank reserves. That money not held in bank reserves is called surplus reserves. Banks then lend out surplus reserves which facilitate the process of money creation.

Money supply

Demand deposits are a significant part of a country's money supply. They are defined in M1 money which consists of demand deposits as well as currency. These deposits constitute a great portion of many countries' money supply.

At the time of the financial crisis, a lot of people withdraw large sums from the bank simultaneously. This leads to demand deposits reduction and money supply decrease, as a result, banks have less money to issue loans.

The way demand deposits operate

Demand accounts provide consumers with the money they need to make a purchase. You can get access to your funds at any moment. Provided depositors were obliged to notify financial institutions before funds withdrawing then depositors would have trouble making day-to-day purchases and paying bills.

Attention! A demand deposit may also mean direct debit permission that is a debit from an account for the purchase of a product or service.

Requirements applied to demand deposits

The main requirements for demand accounts are the absence of restrictions on withdrawals or transfers of funds, no set maturity or blocking period, availability on request, and no requirements for members.

Particular considerations

These accounts provide an opportunity to have co-owners. The owners need to put their signatures when setting up an account but only the signature of only one owner is needed when the account is being closed. Any owner can withdraw and deposit funds, draw cheques and the permission of the other owner is not necessary.

Many banks apply minimum balances on their demand deposits. Accounts below the minimum value are usually charged a commission every time the balance falls below the desired value. But nowadays many banks provide no minimum balances or monthly charges.

Differences between demand and savings accounts

Commission for having an account

When an individual opens a demand account the bank requires to meet certain criteria. For instance, it may be necessary to keep a specified sum of money in the account. This sum is called a minimum balance.

Some banks claim their clients to make a minimum quantity of transactions a month. If a demand account holder does not comply with these rules then a monthly maintenance charge can be incurred.

In addition, other fees may be imposed by a bank or another financial institution. These include ATM, overdraft protection, overdraft, and Internet access fees. The exact amount of commissions depends on the bank.

On the contrary, savings accounts usually do not require a fee. Generally, the only requirement is not to exceed withdrawal limits. However, several banks have set the requirement for a minimum balance. This means that customers need to either keep a minimum balance or make a specified quantity of transactions within a definite time period. Otherwise, affected clients are at risk of covering an account maintenance fee.

Percentage rates

Note! Demand accounts practically don't bring interest in the majority of banks and credit unions.

At the same time, the percentage can be earned through savings accounts. However, rates differ depending on the bank. When determining the rate applied two main things are considered by banks, these are the savings account type that an individual has and the number of funds deposited.

Percentage rates on-demand accounts are always lower than those on savings accounts. At the same time, higher rates are typically provided by online banks rather than traditional ones.

Paying bills

When opening a demand account a customer gets access to various transactions. For instance, a holder of an account can apply an automatic bill payment feature for recurring installments like water and electricity bills. The account can also be used for lump-sum payments.

At the same time savings accounts do not afford such transactions. Thus, if a client wants to make such transactions with the funds available in the savings account, firstly the money must be transferred from the savings to the demand account.

Debit cards

A demand account frequently comes with a debit card which simplifies access to funds through ATMs and paying for services and goods. However, it should be noted that a customer can only utilize the money that has been previously credited to the account.

There are different savings accounts but they don't come with debit cards.

Restrictions / Limits

With a demand account, you can perform as many transactions as you want. Thus, you can make unlimited withdrawals and deposits. However, maintenance charges may apply to transactions that exceed the set monthly limit. For example, a demand account holder might have to cover a commission for issuing over 10 cheques a month.

On the contrary, savings accounts are for casual use. Most banks set a limit on the number of withdrawals from an account during a certain period. The average number of withdrawals that can be made per month ranges from three to six. However, there is no limit on the number of deposits.

Related terms and abbreviations

  • Call deposit account. A bank account that combines some of the functions of a savings and current account.
  • Clearing and settlement (C&S). The process by which banks collect or disburse funds transferred or deposited into accounts with their institution. This process allows banks to accept each other's checks and drafts for deposits. The Canadian Payments Association operates Canada's clearing system.
  • Combined account. An account that is partly accumulative and partly current. You can write checks and you will be paid interest if you have enough money in the account.
  • Online banking (OLB). Access from a personal computer, smartphone, or terminal to banking information, accounts, and certain transactions via a financial institution's Internet website or app. Also known as Internet banking
  • Joint account (J / A). A bank account is held by two or more customers who equally share the rights and obligations of the account.
  • Personal savings.
  • Retail banking. Banking services offered to individual clients like personal loans, savings accounts, check to cash, and RRSP.
  • Savings account. A financial account that pays interest with low risk.
  • Installment tax plan (TIPP). A popular property tax payment plan that allows you to pay taxes monthly without any penalties or additional fees.
  • Time deposit. A deposit account type with a fixed maturity in which the account is reverted to a different type or "rolled over" for another fixed period of time.
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