Demand Deposit

What Is a Demand Deposit?

A demand deposit account (DDA) is a bank account from which deposited funds can be withdrawn at any time, without advance notice. DDA accounts can pay interest on the deposited funds but aren’t required to. Checking accounts and savings accounts are common types of DDAs.

Key Takeaways

  • Demand deposit accounts allow funds to be withdrawn at any time from the financial institution. 
  • Demand deposits provide the money consumers need for cash and for daily expenses and purchases.
  • Demand deposit accounts pay little or no interest—the trade-off for the funds being so readily available.
  • Demand deposit accounts can have joint owners: Either owner may deposit or withdraw funds and sign checks without permission from the other.
  • Demand deposit accounts contrast to time or term deposit accounts, in which the funds are locked up for a certain period, unavailable for access without penalty, if at all.  
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Demand Deposit

How Demand Deposits Work

If depositors were required to notify their banks in advance before withdrawing funds, it would be quite a challenge to obtain cash or make mundane transactions. Demand deposit accounts (DDAs) are intended to provide ready money—the funds people need to make a purchase or pay bills.

The account's holdings can be accessed at any time, without prior notice to the institution. The account holder simply walks up to the teller or the ATM—or, increasingly, goes online—and withdraws the sum they need; as long as the account has that amount, the institution has to give it to them. The money is available "on-demand"—hence, the name "demand deposit" for this sort of account.

Demand deposit accounts, which typically are offered by banks and credit unions, are in contrast to investment accounts offered by brokerages and financial services firms. While the funds may be invested in highly liquid assets, the account holder still must notify the institution that they wish to withdraw money; depending on the asset in question, it may take a day or two for the investments to be sold and the cash to be available.

"DDA" can also mean direct debit authorization, which is a withdrawal from an account for purchasing a good or service. It's what happens when you use a debit card. But it's fundamentally the same concept: The money is immediately available, drawn on the linked account, for your use.

Special Considerations

Demand deposit accounts (DDAs) may have joint owners. Both owners must sign when opening the account, but only one owner must sign when closing the account. Either owner may deposit or withdraw funds and sign checks without permission from the other owner.

Some banks create minimum balances for demand deposit accounts. Accounts falling below the minimum value typically are assessed a fee each time the balance drops below the required value. However, many banks now offer no monthly fees and no minimum balances. 

Types of Demand Deposit Accounts (DDAs) 

DDAs are primarily checking accounts, but they can include savings accounts as well. Money market accounts (MMAs) are a bit of a gray area: Some financial authorities classify them as DDAs, some don't (see Demand Deposit vs. Term Deposit below).

Demand deposits make up most of a particular measure of the money supply called M1. M1 equals the sum of all of a nation's demand deposits, plus all the currency in circulation. It's a measure of the most liquid types of money in the money supply.

As of March 30, 2021, the total amount of demand deposit accounts in the U.S.—officially, the total demand deposits component of M1—was $3.76 trillion. This compares to $1.1 trillion five years ago and $512 billion 10 years ago.

Requirements for Demand Deposits

The key requirements of DDAs are no limitations on withdrawals or transfers, no set maturity or lockup period, funds accessible on-demand, and no eligibility requirements. 

The payment of interest and the amount of interest on the DDA are up to the individual institution. Once upon a time, banks could not pay interest on certain demand deposit accounts. For example, the Federal Reserve Board's Regulation Q (Reg Q) enacted in 1933, specifically prohibited banks from paying interest on checking account deposits. (Many banks got around that rule via negotiable order of withdrawal (NOW) accounts, checking accounts with a temporary holding period on funds, which allowed them to actually pay some interest.) Reg Q was repealed in 2011.

Still, DDAs tend to pay relatively low-interest rates (on savings accounts) no interest at all (as is often the case with checking accounts, Reg Q's repeal notwithstanding). They may also charge various fees for handling the account.

Demand Deposit vs. Term Deposit

A demand deposit account (DDA) and a term deposit account are both types of financial accounts offered by banks and credit unions. But they differ in terms of accessibility or liquidity, and in the amount of interest that can be earned on the deposited funds.

Basically, a DDA allows funds to be accessed anytime, while a term deposit account—also known as a time deposit account—restricts access to funds for a predetermined period. Funds cannot be withdrawn from a term deposit account until the end of that term without incurring a financial penalty, and withdrawals often require written notice in advance.

The most familiar type of term deposit account is the certificate of deposit (CD). You buy the CD for a set term or time period—a certain number of months or years—and you generally don't touch it until the term is up. It sits in a special account, earning interest at a fixed rate.

That interest is the second big thing distinguishing demand deposits from term deposits. Term deposits offer interest rates that are generally higher DDAs—much closer to prevailing market rates. That's basically the trade-off: In return for the ability to access your funds on demand, your money earns less in a DDA. The time deposit pays more, in compensation for its lack of liquidity.

Where do money market accounts (MMAs) fit into the equation? They're a hybrid: They let account-holders deposit and withdraw funds on demand and they typically pay market interest rates (it fluctuates). However, they aren't quite as on-demand as regular demand deposit accounts: MMAs typically limit withdrawals or other transactions (like transfers) to six per month. Fees may apply if the limit is exceeded. For these reasons, some authorities don't consider money market accounts true DDAs.

Federal Reserve Regulation D limits MMA-holders to a total of six electronic transfers and payments (via check or debit card) per month. However, depositors can make an unlimited number of transfers in person at the bank or at an ATM.

What Does DDA Mean on a Bank Statement?

The acronym DDA stands for "demand deposit account," indicating that funds in the account (usually a checking or regular savings account) are available for immediate use—on-demand, so to speak. DDA can also stand for "direct debit authorization," meaning a transaction, such as a transfer, cash withdrawal, bill payment, or purchase, which has immediately subtracted money from the account.

What Is a Consumer DDA Account?

A consumer DDA is a demand deposit account. Such an account lets you withdraw funds without having to give the financial institution any advance notice.

What Is the Difference Between Demand Deposits and Time Deposits?

Demand deposits consist of funds the account holder can access right away: They are available anytime. The funds in a checking or regular savings account usually consist of demand deposits.

In contrast, time deposits, aka term deposits, are not immediately at the account holder's disposal. They are funds that have been deposited with the understanding that they will remain untouched for a certain specified period of time—months or even years. Certificates of deposit (CDs) are a common type of time deposit.

What Are the Advantages of Demand Deposit Accounts (DDAs)?

With demand deposit accounts (DDAs), your money is completely at your disposal. You can withdraw the funds in form of the cash or to pay for something (using a debit card or online transfer) at any time, without giving the bank notice or incurring a penalty, or paying fees.

So DDAs are ideal to meet everyday expenses, make mundane purchases, or pay regular bills. They offer the utmost convenience for getting cash or transferring funds to another account or another party.

The Bottom Line

Offered by banks and credit unions, demand deposit accounts allow you to deposit to and withdraw funds immediately, whenever you want—"on-demand," in effect. The financial institution can't require advance notice or charge a fee for letting you access the funds. Ideal for frequent or everyday needs. DDAs usually take the form of checking or savings accounts.

The main drawback of DDAs is that they offer little or no interest in the money in them. That's the price you pay for the funds being readily available.

Article Sources

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  1. St. Louis Fed. "Demand Deposits: Total." Accessed March 30, 2021.