While banks are not the key reason we no longer rely on horses for transportation or live brutish, short lives, they are critical to both innovation and wealth generation at both a societal and individual level. Banks and other forms of financial institutions have evolved over thousands of years as have their services. The checking account, which was introduced in 1762 by the British banker, Lawrence Childs, is one such service.
Theoretically, checking accounts are a means to increase your wealth, provide a safe haven for your cash and, through their efficient processing, decrease the risk of market exchanges. Here are a few practical facts regarding these accounts.
Function of Checking Account
A checking account owner deposits cash with a financial institution for safekeeping. Based on a note, or check that the depositor creates, the institution pays the depositor’s debt from his checking account. To do so, the bank either sends the check to the Federal Reserve or a private clearinghouse to clear the check and transfer the specified funds.
What’s more, the owner of the checking account can request his banker to transfer money from that account to another whether the receiving account is within the same institution or at another establishment. For instance, cash can be transferred from checking to savings or from a credit union to a bank.
Read More: How to Open a Checking Account
Checking Account Usage
Using an ATM, direct deposit, a link to an external account, mobile app and over-the-counter deposits, a consumer can set up a checking account at a financial institution’s branch or through its website. To access those funds, the account owner writes a check, makes an ATM withdrawal or uses their account’s debit or credit card. Also, users can rely on electronic transfers and smartphone apps to pay bills, rather than writing and mailing a check. The consumer can also set up automatic payments.
Here are some terms to know when using a checking account:
- Direct Deposit: Cash can be electronically deposited into your checking account, which speeds the transfer of money to your account and quickens the point at which funds are available to you. Based on your selection of direct deposits, your bank may waive minimum account balance requirements and monthly maintenance fees.
- Electronic Funds Transfer: An EFT, or a wire transfer, moves cash to your checking account, which eliminates the time delay of receiving a check by mail.
- ATM: An ATM is a convenient way to access the cash in your checking or savings account. You incur a fee if you use an ATM that’s out-of-network or not affiliated with your financial institution.
- Cashless Banking: A debit card is an easy and free way to access your checking account and conduct transactions. To widen the appeal of debit cards, the card issuer offers zero-liability fraud protection to counter the risk of identity theft if the card is stolen.
Checking Account Features
Here are some common features you'll find when exploring checking accounts:
- Rewards: Your bank may allow you to earn rewards on your checking account. Some rewards programs allow you to earn and redeem points for travel, gift cards and merchandise.
- No-fee Checking Account: Rather than impose ATM access fees, checking account fees and online account fees, some community banks and credit unions provide checking accounts with no monthly service fees.
- Keep the Change Savings Option: This service automates deposits to your savings account at the time as a purchase by rounding up a purchase amount to the nearest dollar and depositing the difference between that number and the actual purchase amount into your savings account. For instance, a purchase of $5.50 is rounded to $6, and the difference of 50 cents is deposited to your savings account.
- Overdraft Protection and Low Overdraft Fees: The provision of overdraft protection for a debit card is a customer-requested service and not an automatic one. This service links your checking account to your savings account, so funds from your savings can be automatically transferred to your checking account to prevent returned checks and declined items.
- Online Banking and Mobile Apps: Online and mobile banking are two ways a consumer can manage his banking tasks, such as paying bills and reviewing purchases rather than using checks.
Benefits of Checking Accounts
Take a look at these six benefits of checking accounts:
- A checking account allows you to buy products and services without the worry of carrying cash or incurring interest due to the use of a credit card.
- The checking account that’s referred to as a negotiable order of withdrawal (NOW) account pays interest on the account balance.
- The checking account is a safe alternative to keeping cash at home.
- The check is a payment alternative for businesses that don’t accept debit or credit card payments.
- The check is a payment alternative in the instance a purchase amount is less than a seller’s minimum purchase amount for digital payments.
- The FDIC typically insures the money in checking and savings accounts according to the form of the account’s ownership and how the account is titled.
Disadvantages of Checking Accounts
Here are four disadvantages of checking accounts:
- Digital payment options, such as debit and credit cards, Venmo and PayPal have become commonplace and a preferred alternative to a signed paper document.
- Writing a check for a purchase is less efficient than using a credit card or smartphone app.
- Banks charge fees for services like checking, ATM access and overdraft protection.
- Banks charge a fee if you write too many checks or overdraw an account.
Moving Forward With Checking Accounts
By using a checking account, you can increase your wealth, provide a safe haven for your cash, minimize the risk and increase the efficiency of financial transactions. For instance, to the extent that your bank has digitized routine customer transactions, like online access to bank accounts and remote deposits, digital transactions greatly decrease the effort you must commit to banking processes. To reap the benefits, however, you must focus on the checking account functions, its features and usage as well as the account’s benefits and disadvantages.
- Fin: Checking Out: A Brief History of Checks
- Federal Reserve: Check Services
- Capital One: How Do I Make a Deposit?
- US Bank: How to Set Up Direct Deposit
- HSBC: Should You Go Cashless?
- Ally: Five Things to Know About Interest Checking Accounts
- Discover: 4 Benefits of Rewards Checking Account
- Bank of America: Keep the Change Savings Program
- WF: Avoid Overdraft Fees
- Consumer Finance: What Is the Difference Between a Checking Account, a Demand Deposit Account, and a NOW (Negotiable Order of Withdrawal) Account?
- Federal Deposit Insurance Corporation. "Weekly National Rates and Rate Caps - Weekly Update." Accessed May 6, 2020.
- Bankrate. "Checking fees rise to record highs in 2012." Accessed May 8, 2020.
- Bankrate. "Best Checking Accounts of May 2020." Accessed May 8, 2020.
- Federal Reserve Bank of New York. "How Effective Is Lifeline Banking in Assisting the ‘Unbanked’?," Pages 1-2. Accessed May 8, 2020.
- Bankrate. "Survey: Rising ATM and overdraft fees leave consumers paying much more than they did 20 years ago." Accessed May 8, 2020.
- Federal Deposit Insurance Corporation. "Deposit Insurance FAQs." Accessed May 8, 2020.
- National Credit Union Administration. "Bank to Credit Union Conversions." Accessed May 8, 2020.
- National Credit Union Administration. "Share Insurance Fund Overview." Accessed May 8, 2020.
Billie Nordmeyer is an IT consultant of 25 years standing. As a senior technical consultant for SAP America and Deloitte Touche DRT Systems, a business analyst, senior staff, and independent consultant, Billie has worked across the retail, oil and gas, pharmaceutical, aeronautics and banking industries. Billie holds a BSBA accounting, MBA finance, MA international management as well as the Business Analyst and Software Project Management certificates from the Cockrell School of Engineering at the University of Texas at Austin.