What is a checking account and how does it work?

Question

Often you see the distinction of a saving accounts and a checking account in personal accounting software. The terminology my bank uses, are personal and saving accounts. At least in the BeNeLux checks are almost non-existents. (Bank checks being the exceptions, which are issued by banks in case one wants to buy a house, car or other big expense).

In my personal bank account the workflow is typically that my income is received by wire transfers through SEPA. My credit/debit cards are linked to my personal bank account as well. I retract cash from my personal account through ATMs. To get paid, I don't have to go to bank to cash a check. The money is wired in through the SEPA system (Single European Payment Area).

I am currently evaluating some accounting software and saw some interesting packages, but that made the distinction between saving accounts and checking accounts.

At first I thought that I should ignore these options since checking accounts suggests an north-american audience since using checks are apparently still widely used on the other side of the pond. However, more and more personal accounting software packages support other then USD currencies, yet remain using the terminology "checking accounts".

My question is, if a checking account is the same as a personal bank account in Europe?

Answer 1

A checking account is one that permits the account holder to write demand drafts (checks), which can be given to other people as payment and processed by the banks to transfer those funds. (Think of a check as a non-electronic equivalent of a debit card transaction, if that makes more sense to you.) Outside of the ability to write checks, and the slightly lower interest rate usually offered to trade off against that convenience, there really is no significant difference between savings and checking accounts.

The software needs to be designed to handle checking accounts if it's to be sold in the US, since many of us do still use checks for some transactions. Adding support for other currencies doesn't change that.

If you don't need the ability to track which checks have or haven't been fully processed, I'd suggest that you either simply ignore the checking account feature, or use this category separation in whatever manner makes sense for the way you want to manage your money.

Answer 2

A savings account and a checking account (or a "demand" account, or a "transactional" account) have different regulations. For example, fractional reserve requirements are 10% against checking accounts, but 0% against savings accounts. The theory is that savings accounts are sticky, while checking accounts are hot money.

So the Fed wants to stop banks from creating accounts that are regulated as savings accounts but have the features of checking accounts. In the past, this was done by forbidding banks to pay interest on checking accounts. They eliminated that rule back in the inflation years, and instead imposed the rule that to qualify as a savings accounts for regulatory purposes, banks must discourage you from using them as transactional accounts. For example, by limiting the number of withdrawals per month that can be made from a savings account.

If the Fed gave up on trying to enforce a distinction, I suspect there would soon no longer be a distinction.

Answer 3

As others have noted, in the U.S. a checking account gives you the ability to write a check, while a savings account does not. I think you know what a check is even if you don't use them, right? Let me know if you need an explanation.

Personally, I rarely write paper checks any more. I have an account for a small side business, and I haven't bothered to get new checks printed since I moved 6 years ago even though the checks still have my old address, because I've only written I think 3 paper checks on that account in that time.

From the bank's point of view, there are all sorts of government regulations that are different for the two types of accounts. But that is probably of little concern to you unless you own a bank.

If the software you have bought allows you to do the things you need to do regardless of whether you call the account "savings" or "checking", then ... who cares? I doubt that the banking software police will come to your house and beat you into unconsciousness and arrest you because you labeled an account "checking" that you were supposed to label "savings". If one account type does what you need to do and the other doesn't, then use the one that works.