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The cheque is the traditional mode of payment for a transactional account.

A transactional account (North America: checking account or chequing account,[1] United Kingdom and some other countries: current account or cheque account) is a deposit account held at a bank or other financial institution, for the purpose of securely and quickly providing frequent access to funds on demand, through a variety of different channels. Because money is available on demand these accounts are also referred to as demand accounts or demand deposit accounts.

Transactional accounts are meant neither for the purpose of earning interest nor for the purpose of savings, but for convenience of the business or personal client; hence they tend not to bear interest. Instead, a customer can deposit or withdraw any amount of money any number of times, subject to availability of funds.

Contents

Features and access

All transactional accounts offer itemized lists of all financial transactions, either through a bank statement or a passbook. A transactional account allows the account holder to make or receive payments by:

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Country specific

Certain modes of payment are country-specific:

Access

An NCR Automated Teller Machine (ATM)

Branch networks

This refers to the practice of maintaining physical locations where customers can receive a wide array of banking and financial services, such locations are described as branches. They may provide access to a combination of cash machines, telephone banking, counter services and financial advice.

Cash machines

Cash machines are electronic devices that allow bank customers to make cash withdrawals and check their account balances without the need for a human teller. Many also allow people to deposit cash or cheques, transfer money between their bank accounts, top up their mobile phones' pre-paid accounts or even buy postage stamps.

Internet banking

Internet or Online banking describes the use of a bank's secure website to view balances and statements, perform transactions and payments, and various other facilities. This can be very useful, especially for banking outside bank hours and banking from anywhere where internet access is available. Since the internet revolution most retail banking institutions offer access to current accounts via online banking.

Telephone banking

Telephone banking is the term applied to specific provision of banking services over the telephone. In many cases such calls are to a call centre or automated service, although some institutions continue to answer such calls in their branches. Often call centre opening times are considerably longer than branches, and some firms provide these services on a 24 hour basis.

Mail banking

Stores and merchants providing debit card access

Overdrafts

An overdraft occurs when withdrawals from a bank account exceed the available balance. This gives the account a negative balance and in effect means the account provider is providing credit. If there is a prior agreement with the account provider for an overdraft facility, and the amount overdrawn is within this authorised overdraft, then interest is normally charged at the agreed rate. If the balance exceeds the agreed facility then fees may be charged and a higher interest rate might apply.

Cost

The policy of charging a fee for doing [financial transaction] depends on a variety of factors, including the country and its overall interest rates for lending and for saving, as well as the size of the financial institution and the number of channels of access it offers. This is why [virtual bank], operating few or no branches can afford to offer low-cost or free banking, and why, in some countries, transaction fees do not exist, but extremely high lending rates are the normal.

[Financial transaction] fees may be charged either per item or for a [{flat rate}] covering a certain number of transactions. Often, [youth]s, [student]s, [senior citizen]s or high-valued customers do not pay fees for basic financial transactions. Some will offer free transactions for maintaining a very high average balance in their account. Other service charges are applicable for [overdraft], [non-sufficient funds], the use of an external [{interbank network}], etc. In countries where there are no service charges for transaction fees, there are, on the other hand, other recurring service charges such as a [{debit card}] annual fee.

Interest

Unlike savings accounts, for which the primary reason for depositing money is to generate interest, the main function of a transactional account is transactional. Therefore, most providers either pay no interest or pay a low level of interest on credit balances.

Checking accounts

Checking account is the name given in North America to a transactional account.

Overdrafts

In North America, overdraft protection is an optional feature of a savings account. An account holder may either apply for a permanent one, or the financial institution may, at its sole discretion, provide a temporary overdraft on an ad-hoc basis.

Interest

In the United States, Regulation Q (12 CFR 217) and the Banking Acts of 1933 and 1935 (12 USC 371a) prohibit a member of the Federal Reserve system from paying interest on checking accounts. This restriction can be circumvented by either creating an account type such as a Negotiable Order of Withdrawal account (NOW account) which is legally not a checking account or by offering interest paying checking through a bank which is not a member of the Federal Reserve system.

High-yield checking accounts

High-interest NOW accounts have become prevalent throughout the industry. They pay a higher interest rate than typical NOW accounts and frequently function as loss-leaders to drive relationship banking.

In 2003, banks and credit unions began to establish maximum balance accounts, which pay a premium rate up to a specified cap and a lower rate on balances above the cap. This counter-traditional trend (banks had typically established minimum account balances rather than maximum account balances) developed as a way to allow financial institutions to attract multiple customer relationships while limiting the interest expense associated with each account.

The first maximum balance, high-interest checking account was offered in 2003 by a small community bank in New Mexico, Pioneer Bank. In 2004 and 2005, several community banks in West Texas expanded the idea, and a 3rd party vendor, BancVue, combined the maximum-balance concept with the idea of a higher yield for specific behavior (introduced by City National Bank in Taylor, Texas) to create “Reward Checking” as a stand-alone product to community banks in 2005. BancVue created a directory of REWARDChecking accounts[2]. In 2007, "High-interest, Free Checking" became the primary focus of Capital One's annual marketing budget. As of 2008, well over 500 community financial institutions were offering "Reward Checking" or another variant of maximum balance checking.

Reward Checking accounts reward consumers in the form of high yields in exchange for performing certain monthly banking activities. These activities typically include:

  • ~10 debit card transactions (non-ATM with no dollar requirements per debit card purchase)
  • A direct deposit or bill pay (depending on the bank)
  • Receive electronic statements (with no paper statement)

If a depositer doesn't meet the above requirements, they won't earn the high yield for that particular month. Instead they will earn a base rate which is usually under 1%. Most banks will send an email explaining the activity that a depositor failed to meet, as such they can return to earning the high yield if they meet the requirements for the next month. Unlike many other checking and money market accounts, reward checking accounts usually lack minimum balance requirements and monthly fees. Balances up to ~$25,000 will earn the top yield, and any balances over this will earn a smaller yield. One more reward offered by most of these accounts is refunds of ATM fees charged when they use another bank's ATM.[3][4] Since then, banks across the nation have yielded their own variations of accounts, often ranging in interest rates.[5]

Current accounts

Current account is the name given to a transactional account in the United Kingdom and countries with a UK banking heritage, offering various flexible payment methods to allow customers to distribute money directly to others. Most current accounts come with a cheque book and offer the facility to arrange standing orders, direct debits and payment via a debit card. Current accounts may also allow borrowing via an overdraft facility.

Lending

Current accounts have two different ways in which money can be lent: overdraft and offset mortgage.

Overdraft

In the UK, virtually all current accounts offer a pre-agreed overdraft facility the size of which is based upon affordability and credit history. This overdraft facility can be used at any time without consulting the bank and can be maintained indefinitely (subject to ad-hoc reviews). Although an overdraft facility may be authorised, technically the money is repayable on demand by the bank. In reality this is a rare occurrence as the overdrafts are profitable for the bank and expensive for the customer.

Offset mortgage

An offset mortgage is a type of mortgage common in the United Kingdom used for the purchase of domestic property, the key principle is the reduction of interest charged by "offsetting" a credit balance against the mortgage debt. This can be achieved via one of two methods either lenders provide a single account for all transactions (often referred to as a current account mortgage) or they make multiple accounts available which allow the borrowers to notionally split their money according to purpose whilst all accounts are offset each day against the mortgage debt.

Interest

In the UK some online banks offer rates as high as many savings accounts along with free banking (no charges for transactions) as institutions which offer centralised services (telephone, internet or postal based) tend to pay higher levels of interest. The same holds true for banks within the EURO currency zone.

See also

Notes

  1. ^ U.S. and Canadian spelling, respectively; see further at Cheque#Etymology and spelling.
  2. ^ http://www.checkingfinder.com
  3. ^ American Banker article, written by Gregory Goth, titled "Luring Them In," http://www.americanbanker.com/btn_article.html?id=20090126O63SKWAE&pagenum=2&numpages=2
  4. ^ Bloomberg article, written by Alexis Leondis, titled "Community Banks Lure Clients With High-Yield Checking" http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aAarfOtUXeKU
  5. ^ Henry. "High Yield Checking Accounts". http://highyieldcheckingaccounts.net/. Retrieved 2010-1-9. 

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