Demand deposits are payable by the bank on demand. Checking accounts are the most common example of demand deposits.
Access to deposits is the most important characteristic in distinguishing demand deposits from savings deposits. Demand deposits have unlimited immediate access. The number of withdrawals is not limited and can be made at any time without penalty or prior notification. Most financial institutions provide their customers many ways to conveniently access their deposits: withdrawing money at the bank, writing a check, at an ATM, use of a debit card, or online banking. Many financial institutions pay interest on demand deposits. However, the interest rate is very low.
Demand deposits are included in M1, the narrowest definition of money. M1 only includes currency, demand deposits, and other liquid deposits.
Data Source: Federal Reserve
In contrast, savings and time deposit accounts are not demand deposits because they have restrictions. For example, certificates of deposit lose interest if they are cashed prematurely. Money market accounts may restrict the number of transactions and/or require a minimum check amount. Depositors may be required to give advance notice when withdrawing funds. Demand deposits and these savings accounts are included in M2, an expanded definition of money.
Data Source: Federal Reserve
Banks may provide checks to customers to access a line of credit. This type of account is a loan and is not considered a demand deposit even though immediate access to cash is available by writing a check.
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