A transaction account, also known as a checking account, is a basic consumer finance tool. It refers to a consumer bank account that allows penalty-free deposit & withdraw, as well as payments to third party accounts via debit card, wire transfer, check, or other medium.
Transaction accounts do not pay interest on deposit because, as the name suggests, they are intended to handle day-to-day transactions and therefore provide less liquidity to the bank for purposes of lending and investing, as opposed to savings accounts where money is held.
Summary
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Transaction accounts are basic bank accounts that don't earn interest.
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Banks use deposits in these accounts to lend and invest.
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They are free as long as basic deposit rules are fulfilled.
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The FDIC guarantees them up to $250,000.
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Student, senior, and premium variants provide customizable terms.
Transaction vs Savings Account
The primary difference between checking (transaction) accounts and savings accounts is the use of interest.
Transaction accounts do not earn interest, whereas savings accounts provide nominal annual rates of return. In addition to interest, some savings accounts impose small penalties for withdraws. They do this as encouragement for depositors to park stable amounts of funds in their account.
With more money left on deposit, banks enjoy higher flux of money available for lending (which is the topic of the next section).
Use of Funds
The world of banking works as follows: consumer & banking depositors put funds into a bank account, and the bank uses those deposits to lend money to other depositors. To protect out- and inflow, banks have strict local reserve rules.
In theory, a depositor with a transaction account and a loan with the same bank is technically lending to herself.
As much as it is inventive and an economic boon, this dynamic also creates a breading ground for bank runs that quickly lead to money and value destruction.
Components
Minimum Balance. The minimum amount of funds a transaction account must have without incurring fees. Banks use minimum balance fees to ensure liquidity for themselves. Without them, unknowing depositors could place the majority of their funds in investments, eliminating the bank's capacity to lend.
Overdraft. Overdraft occurs when the depositor withdraws more funds than she has available in her account, and the bank lets the transaction go through anyway. In this case, the bank charges a small fee because it effectively "lends" that amount to the depositor. In this way, the fee acts as compensation in the same capacity as interest does on traditional loan structures.
Minimum Inflow. Minimum inflow is a requirement for a minimum amount of deposits made into the account each month without penalty fees. It's a less common feature but one for which it is important to look. Otherwise, depositors can end up having to rework their budget or switch banks to avoid the fee.
ATM Access. ATM access is the ability to withdraw cash money from a number of automated teller machines that are open during longer hours than the bank itself, often 24/7. Most checking accounts provide this service because it has become a norm, although transaction mediums are increasingly non-cash and digital.
Autopay. Autopay is ability to set automated regular payments to internal or external accounts for the purposes of account and expense management, usually each month but available in a number of different frequencies, even weekly.
Debit cards. Debit cards are free material cards to make payments straight from your account. Many of them can now be de-materialized. Most accounts come with them at opening, but some require a separate request.
Fees
In principal, checking accounts are free. That said, some incur fees such as the following.
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Monthly Service Fee. This is a monthly fee charges on your account for the simple maintenance. Banks argue this fee exists as compensation for the safety that the bank provides, but in an increasingly digitalized system opponents claim the fee should not exist.
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Per Check Fee. For those still using physical checks for payments (where "checking" account gets its name), some banks charge a fee for each check used to draw funds from the account.
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Check Printing Fee. A fee for printing a book of checks.
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ATM-Use Fee. A fee charged either for general use of ATMs or simply for each transaction.
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Overdraft Fee. A fee charged for overdraft, as defined in the previous section.
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Return Deposit Fee. A fee charged when an account holder deposits a check from someone else and there is not enough money in the sender's account. This is used to avoid fraud and cover reverse logistics.
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Stop Payment Fee. A stop payment fee can be paid when a check writer changes his mind about a check and wants to prevent the withdraw of funds.
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Phone Inquiry Fee. Very rarely, a bank may charge a fee when the depositor calls for account information, such as the balance.
You can find these in the banks fee schedule, usually available online.
Types
There are 6 common types of transaction accounts. Each of them is structured in a way to cater to the needs of a specific group of people.
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Standard. The most basic form of account used to service the needs of the general public.
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Premium. These accounts provide interest on deposits and require a higher balance as compensation.
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Student. Student checking accounts often forego minimum account balance fees to provide students with more flexibility.
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Business. These accounts are intended to serve the needs of businesses. They have few differences and generally serve simply as a means to differentiate from personal accounts for business purposes.
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Senior. Senior accounts are designed for those aged 62 and up.
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Second Chance. These are accounts designed to accommodate those with blemished banking history who can't qualify for any of the other accounts above.
Interest
Transaction accounts do not earn interest. This is the key attribute that differentiates them from savings accounts. The only exception is premium checking accounts.
FDIC Guarantee
The Federal Deposit Insurance Corporation (FDIC) guarantees partner institution deposits up to $250,000 per depositor, per bank. The amount also applies to so-called ownership categories, usually defined by the type of owner (single or joint), as well as whether the account is a Trust, retirement, benefits plan, or government. Business accounts are also technically treated as a separate category.
NIBTAs
For the sake of completeness, the official legal term for checking accounts is "Non Interest Bearing Accounts," or NIBTAs. This term is synonymous with checking and transaction accounts, except those that include interest by agreement such as premium variants.
How to Choose
For most people, a standard checking account with an FDIC-insured institution is sufficient. The exceptions include students and seniors who can benefit from custom accounts of the same names with advantageous fee schedules.
For example, a student with only $300 on deposit might normally be charged a $5 minimum balance fee each month, but she would not have to pay this in a student checking account.
Likewise, a 70-year-old retiree with monthly social security payments may leave a small balance and be charged the monthly fee in a standard account but avoid the fee when using a senior account.
Conclusion
Despite how thorough this article has been, transaction accounts are normal bank accounts most people use every day. Most readers already have one.
A standard type is sufficient for most people, and a banker can help you decide if an alternative type better suits your circumstances.
