What are basic deposits?

Core deposits are the main sources of money for local banks and credit unions. In general, central deposits range from smaller sources, such as individual consumer savings accounts, to larger sources, such as company current accounts and money market accounts. One of the main uses of central deposits is as a source of funds to provide loans to depositors. A financial institution often offers incentives to entice customers to choose specific deposit products, often in an effort to increase and/or maintain their core deposits.

Most community banks and credit unions are based on the premise that the money customers hold in their various bank accounts will be used as collateral to make loans to other customers. These deposits made by regular customers are known as prime deposits and are often critical to the functioning of the financial institution. Some of the more common sources include checking accounts, savings accounts, certificates of deposit (CDs) and money market accounts.

Financial institutions typically earn a significant portion of their general income from interest and fees associated with loans and other services made possible by principal deposits. In general, the greater the number of customers and primary deposits the financial institution can attract, the greater its ability to lend money and generate income. Generally, the higher a bank's income, the more it can grow and the more products and services it can offer.

Due to the connection between core deposits, product offerings and revenue, many banks and credit unions offer incentives to entice consumers and businesses to choose them. At the consumer level, these incentives can include tangible gifts, such as small appliances such as digital music players, that are presented to the customer when they open an account. They can also include less tangible rewards and savings, such as checking accounts with no minimum balance requirements or debit cards with no associated ATM fees. For companies, incentives can include checking accounts with no maximum number of checks per month or CDs with above-average rates of return.

In recent years, many financial institutions have faced difficulties in maintaining and/or increasing central deposits. Economists believe a possible cause for this is the expansion of online financial institutions, which can often offer higher returns on products like certificates of deposit because they have lower overhead costs. Another possible cause put forward by many economists is the general trend of lower consumer savings. The incentives described above are one of the main methods used by many local institutions to help combat the decline of central deposits.

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