Checking Account

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What is a 'Checking Account'

A checking account is a deposit account held at a financial institution that allows withdrawals and deposits. Also called demand accounts or transactional accounts, checking accounts are very liquid and can be accessed using checks, automated teller machines and electronic debits, among other methods. A checking account differs from other bank accounts in that it often allows for numerous withdrawals and unlimited deposits, whereas savings accounts sometimes limit both.

BREAKING DOWN 'Checking Account'

Checking accounts can include business accounts, student accounts and joint accounts, along with many other types of accounts that offer similar features. In exchange for liquidity, checking accounts typically do not offer a high interest rate, but if held at a chartered banking institution, funds are FDIC guaranteed up to $100,000 per individual depositor.

Checking Accounts as Loss Leaders

Many banking institutions offer checking accounts for minimal fees or low fees, and traditionally, most large commercial banks use checking accounts as loss leaders. A loss leader is a marketing tool in which a company offers a product or several products below market value to attract consumers. The goal of most banks is to attract consumers with free or low-cost checking accounts and then entice them to use more profitable features such as personal loans, mortgages and certificates of deposit.

However, as alternative lenders such as financial technology (fintech) companies offer consumers an increasing number of loans, banks may have to revisit this strategy. For example, banks may decide to increase fees on checking accounts if they cannot sell enough profitable products to cover their losses.

How Checking Accounts Affect Money Supply Measurements

Because money held in checking accounts is so liquid, aggregate balances nationwide are used in the calculation of the M1 money supply. M1 is one measure of the money supply, and it includes the sum of all transaction deposits held at depository institutions, as well as currency held by the public. M2, another measure, includes the all of the funds accounted for in M1, as well as funds in savings accounts, small-denomination time deposits and retail money market mutual fund shares.

Using Checking Accounts

Consumers can set up checking accounts at bank branches or through a financial institution's website. To deposit funds, account holders can use ATMs, direct deposit and over-the-counter deposits. To access their funds, they can write checks or use electronic debit or credit cards connected to their accounts. Thanks to advances in electronic banking, many people can now use checking accounts to set up automatic payments of routine monthly expenses with a one-time setup, and they can also use smartphone apps for making deposits or transfers.