💸 TRANSACTION AND NON-TRANSACTION DEPOSITS: THE BATTLE OF THE BANK BALANCE

Let’s face it: banks are like squirrels—always hoarding nuts $($a.k.a. money$)$ for winter. But where do they get those nuts? Enter the world of deposits—the life force of banks, credit unions, and S&Ls $($savings and loans$)$. Let’s take a stroll through the deposit forest and see what kinds of financial acorns we’re dealing with.

🌰 Deposits: The Lifeline of Banks

Most depository institutions—commercial banks, S&Ls, credit unions—rely heavily on deposits. Why? Because they’re cheap, accessible, and reliable. Think of deposits as your grandma’s secret cookie jar—full of goodies you can use for future adventures $($like issuing loans$)$.

But bankers always have two burning questions:

What’s the cheapest way to fund all these loans?
How do we attract more of these precious deposits?

Answering these leads us into two big buckets: transaction deposits and non-transaction deposits. But before diving into those, let’s clear up one thing…

🏦 Who’s a Bank, Really?

In this context, “bank” is like calling all facial tissues “Kleenex.” Whether it’s a commercial bank, credit union, or S&L, we’re talking about institutions that accept deposits and make loans. The rules might differ a bit $($taxes, regulations, etc.$)$, but deposit types are more or less the same.

So now, let’s jump into the first major category…

💳 TRANSACTION DEPOSITS: The On-Demand Wallet

Think of transaction deposits as the Swiss Army knife of bank accounts. They’re primarily used for payments—swiping a debit card, transferring money online, or even $($gasp!$)$ writing a paper check.

These are also called demand deposits, because customers can demand their money right now. No need to schedule an appointment, chant a magic spell, or even give notice.

🔄 Predictability Problem

The catch? These deposits are unpredictable. They could vanish anytime, like socks in a washing machine. Because of this, they have short maturities from a funding perspective.

So what types do we have here?

📝 Noninterest-Bearing Demand Deposits

The OG checking account.
Historically, these didn’t earn interest—thanks to the Glass-Steagall Act of 1933.
Mostly used by businesses.
Changed in 2009 when the Wall Street Reform Act allowed banks to offer interest to corporate accounts.

🧾 Interest-Bearing Transaction Accounts

Enter NOW accounts $($Negotiable Order of Withdrawal$)$—a 1970s invention allowing interest on checking accounts. Banks had the right to ask for prior notice before withdrawals, but—let’s be honest—they hardly ever did.

Regulation Q tried to stop banks from engaging in interest-rate wars, thinking they’d blow themselves up. This rule was lifted in the 1980s, and then BAM! Banks started offering fancy features like:

Automatic transfers $($savings to checking to cover overdrafts$)$
Interest on checking for individuals and nonprofits $($businesses still excluded$)$

💼 Money Market Deposit Accounts $($MMDAs$)$

Think of MMDAs as checking accounts that went to business school.

Created by the Garn-St. Germain Act of 1982 to compete with money market funds.
Offer market-based interest rates.
Limited check-writing privileges.
Businesses, individuals, and nonprofits can all play.

There’s also a fancier cousin: Super NOWs $($SNOWs$)$—because apparently banks wanted cool acronyms too.

📱 Mobile Check Deposits: A Glimpse Into the Future

Imagine taking a selfie of your paycheck and instantly seeing money in your account. That’s mobile deposit.

But it raises questions:

Will checks go extinct like dinosaurs?
Do we still need bank branches? Or even ATMs?
Will banks be run entirely from apps?
Can mobile banking increase deposits from people who’ve never entered a bank?

This brings us to a crucial transition…

🤔 If transaction deposits are all about easy access and payments, what about people who just want to save for a rainy day?

💰 NON-TRANSACTION DEPOSITS: The Rainy Day Fund

Non-transaction deposits are your long-term roommates. They don’t leave you in the middle of the night to go on an impulse shopping spree.

Also known as savings or thrift deposits, these are meant for:

Emergencies
Future purchases
Retirement savings

They usually pay interest and involve less processing work for banks, so overall they’re like that reliable friend who always brings snacks to the party.

Let’s look at the different sub-types.

📘 Passbook Savings Accounts

Classic savings accounts
Could be opened with as little as $5
No withdrawal limits $($technically$)$, but banks could ask for notice $($though they rarely do$)$
Open to individuals, nonprofits, governments, and businesses

⏳ Time Deposits $($Certificates of Deposit or CDs$)$

Fixed maturity from 7 days to 5+ years
Often non-tradable $($retail$)$ or negotiable $($jumbo CDs over $100,000$)$
The negotiable ones can be sold before maturity

New flavors of CDs include:

Bump-up CDs: Switch to higher rate if rates go up
Step-up CDs: Rates increase periodically
Liquid CDs: Allow partial withdrawals without penalty
Index CDs: Tied to something exciting like the S&P 500

If grandma buys a CD with her $50,000 for a year—she’s stuck. But if a company buys a $10 million negotiable CD, it can trade it before maturity like a hot potato.

🧓 Retirement Deposits: Long-Term Love

Keogh plans, IRAs, and Roth IRAs are all about saving for the golden years.

Traditional IRA: Tax-deferred contributions
Roth IRA: After-tax contributions, tax-free withdrawals
Keogh plans: For the self-employed

Thanks to the Pension Protection Act of 2006, employers can auto-enroll employees. Think of it as a nudge-nudge to save money.

Even though retirement accounts make up a small slice $($<5%$)$ of total bank deposits, they’re stable. Why? Because taking money out early means paying a fat penalty.

🧠 Bringing It All Together

Let’s recap with a thought experiment:

You’re a bank manager. You want cheap, sticky, and safe money to fund loans. Transaction deposits give you flexibility and volume, but they’re unpredictable. Non-transaction deposits stick around longer but may cost more in interest.

You now face these questions:

How do you balance between cost and stability?
Can mobile tech convert low-sticky deposits into high-sticky relationships?
Is it better to have a thousand squirrels $($small deposits$)$ or one elephant $($jumbo CD$)$?

🎯 Final Thought: Deposits Aren’t Just Money, They’re Strategy

Whether it’s grandma’s passbook, a tech-savvy Gen Z’s mobile deposit, or a megacorp’s jumbo CD—each deposit type carries a different risk, reward, and purpose.

Banks aren’t just storing your money—they’re strategizing with it.

So next time you deposit a check, just remember: you’re a key player in a squirrel’s winter survival plan… and possibly their long-term growth strategy. 🐿️📈