What Is a Merchant Bank Account? How It Works

Guide to Merchant Bank Accounts

If you run a business, you may well need a merchant bank account, which is an account that allows you to make and accept credit cards and other forms of electronic payment. That’s because for those who are merchants today, the once-popular forms of payment, such as cash and checks, are often replaced by newer, seamless options. To keep pace and facilitate your business, you need to adapt and adopt the latest technologies.

But even if you are convinced that you need a merchant bank account, you may wonder:

•   What exactly are merchant bank accounts?

•   How do they work?

•   When and why might you need one?

•   What does an application involve?

This guide will answer these questions and much more.

What is a Merchant Account?

As the name suggests, a merchant account is a specific type of business account, designed for those who sell products and/or services. This kind of account allows a company to accept credit cards and other forms of electronic payments when a customer is making a purchase. It differs from a basic business account in that the bank gets deeply involved in the payments. In fact, every single dollar that flows through their system on behalf of their client (the merchant) could wind up being charged back, which might mean the bank is responsible for refunds. So as you can see, it’s not at all your usual business account.

Recommended: How to Set Up and Use a Business Bank Account

How Do Merchant Accounts Work?

Let’s take a closer look at how merchant business accounts actually work. If a business wants to accept credit cards, debit cards, and/or electronic forms of payment, they must first apply to open an account with a bank that provides merchant services. When they get accepted by that merchant bank, they can begin their transactions. Among merchant banks, fees for conducting these transactions will vary, so it’s wise to comparison-shop before you decide which financial institution is your first choice.

Here’s a bit more detail on how merchant accounts actually work. Let’s say that Retailer A has chosen a merchant bank, been approved, and now accepts credit and debit cards in their store. When customers at Retailer A’s store use credit cards and other electronic payment forms to make their purchases, the dollar amounts of these purchases are credited to the retailer’s merchant account.

Funds may sit tight for a day or two while processing takes place. Once this is completed, the merchant services provider may place those funds into Retailer A’s bank account, making them available for the retailer to use. Processing fees are usually deducted from the amount deposited, which is how the merchant bank gets paid for their services.

Typically, the bank takes a per-transaction fee and the network processing the payment also gets a cut. A wide range of fees is possible, from 0.5% to 5.0% of the transaction, plus an additional 20 or 30 cents per transaction.

Documents Required for Opening a Merchant Account

If you decide that a merchant account is right for you, you’ll need to apply for one. You may be asked to provide the following pieces of information:

•   A completed application form that includes:

◦   Business name, contact information, and tax ID (EIN)

◦   Bank account information and a voided check to provide the account number and routing number

◦   Estimated monthly processing volume

◦   Authorized signer information

•   Valid IDs, such as a driver’s license and passport for each of the business owners

•   Current utility bill to verify the business address

•   Business banking statements (perhaps three months’ worth)

•   Credit card processing statements (perhaps three months’ worth) if the business has been using another merchant bank

Specifics can vary, so ask the merchant bank of choice what they require.

Merchant Acquiring Bank Services

If you are pursuing a merchant bank account, you are likely to hear the term “merchant acquiring bank,” “acquiring bank,” or “acquirer.” In all these cases, this language refers to the bank that is going to approve your account and handle the payment acceptance and processing. So an acquiring bank (or “acquirer”) is the financial institution that processes a business’s credit and debit card payments. In other words, these are the services being provided by a merchant bank.

How Merchant Transaction Processing Works

Curious about how these merchant bank accounts operate? Here’s a behind-the-scenes look at what happens as transactions are processed, step by step.

1.    The acquirer receives details about credit and debit card transactions from the merchant (Retailer A). This information is then sent to the card issuers—the financial institutions that issue credit cards to consumers — for authorization.

2.    Once that’s received, the credit card processing can continue.

3.    The acquirer will then typically forward funds to the merchant’s (Retailer A’s) business bank account according to the terms of their agreement. In other words, an acquirer facilitates this payment process.

4.   The bank that issued a credit card to a consumer, as part of this process, will add the charges made by an individual to their credit card balance.

Those steps give you an idea of how the process flows for transactions in a merchant bank account.

What is Underwriting for a Merchant Account?

When you apply to open a merchant bank account, the process is considerably different than opening, say, a business bank account or personal checking account. Underwriting is part of the process. This process occurs when an acquirer reviews the application of a merchant/retailer who wants to accept credit and debit payments and so needs a merchant bank. The underwriter reviews the risks involved if they were to serve as a merchant bank for that retailer (which can involve their being on the hook for refunds for a period of time). They want to delve into your business to know that you are worth their taking on the risk of being your merchant bank. Once they’ve assessed a variety of factors and indicators, they then determines whether or not to approve your application.

Do I Need a Business Bank Account?

If you’re thinking about applying for a merchant bank account, you will also need a business bank account. Here’s why: That’s where the merchant bank can deposit your funds from electronic payments. This holds true even if you are a sole proprietor. In other words, you’ll need a merchant checking account that’s separate from a personal account. Hopefully, that account will grow along with your business’ value.

Ask your bank of choice about opening a business account, including about the documentation you’ll need to give them. Expect to provide them with an employer identification number (EIN).

Do I Need a Business License?

As you consider a merchant bank account, you may wonder if you need a business license, and the answer is usually yes. While there may be exceptions, you will likely need a business license for other reasons on your professional journey. So it can make sense to explore business structure options at your soonest opportunity. You might look into whether your business should be an LLC or if you should becoming incorporated.

If you’re just starting a business, you’ll probably want to delve into such matters as small business startup costs and small business loan fees, as well as debt financing. Educating yourself about the finances of running a business is an important step beyond getting your accounts and payments established.

Accepting Different Types of Payments

Merchant bank accounts are an important partner for businesses today. A key benefit of having a merchant bank account is that it makes it much easier for customers to transact with you, both in person and online. Nowadays, fewer people walk around with cash in their pockets or a checkbook in a wallet or purse. Allowing them to swipe a plastic card or enter their card numbers online can significantly expand the number of people who can shop with your business.

How Long Does It Take to Set Up a Merchant Account?

If you’re wondering how long it takes to set up a merchant bank account, the answer is honestly a not so helpful “It depends.” Situations differ — and so can timelines. That said, if everything on a retailer’s application is complete and acceptable to the merchant bank, the process can be quite fast. You might get up and running in perhaps just a day.

What is PCI Compliance?

As you embark on your pursuit of a merchant bank account, you will probably encounter the initials PCI. Short for “payment card industry,” PCI compliance is required by credit card companies to ensure that electronic transactions are secure, operationally and technically. PCI standards. There are a variety of standards these businesses must adhere to in order to keep their business safe. If you are operating a business, you will probably see assurances of PCI compliance in your communications with credit card companies, reassuring you that they are following these guidelines.

Other Considerations for Merchant Accounts

Before we wrap up, let’s mention a few other terms and considerations you are likely to learn about as you pursue a merchant bank account. The industry uses the term “payments processor” in more than one way. Here’s a little intel to keep in mind:

•   An issuer processor focuses on helping banks to issue credit and debit cards to consumers and otherwise manage that process.

•   An acquiring processor, however, addresses the issues we’ve discussed above. An acquiring process also deals with customer requests for information about transactions, disputes made about them, and chargebacks.

Knowing the difference between these terms can be helpful as you understand how merchant banks conduct business.

The Takeaway

By exploring the questions “What is a merchant bank account?” and “How do merchant accounts work?” you’ll gain an understanding of what is involved if you are a business owner accepting credit card and online payments. These merchant accounts facilitate the handling and processing of payments so your company can thrive.

But business bank accounts aren’t the only ones to study. If you’re curious about just how good your personal accounts could be, take a look at what online banking with SoFi offers. If you join and set up direct deposit, you’ll earn a terrific 2.00% APY, plus you’ll have access to your paycheck up to two days early, and you won’t pay any account fees, whether minimum-balance, monthly, or overdraft.

Bank better with SoFi.

FAQ

Is a merchant account the same as a bank account?

A merchant account is a very specific type of business bank account. It allows a business to accept credit cards and other forms of electronic payments when selling products and services to consumers.

What is a merchant service account?

Merchant service accounts are a specific type of business account. They are used by business owners who want to accept credit cards and other electronic payment forms at their company. Businesses that will only accept cash and checks would not need this type of account.


Photo credit: iStock/gece33

SoFi members with direct deposit can earn up to 2.00% annual percentage yield (APY) interest on all account balances in their Checking and Savings accounts (including Vaults). Members without direct deposit will earn 1.00% APY on all account balances in Checking and Savings (including Vaults). Interest rates are variable and subject to change at any time. Rate of 2.00% APY is current as of 08/12/2022. Additional information can be found at http://www.sofi.com/legal/banking-rate-sheet
SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2022 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
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What Is an Interest-Bearing Checking Account?

What Are Interest-Bearing Checking Accounts?

Did you know that there are checking accounts out there that pay interest? For some people, these interest-bearing checking accounts come as a surprise. Many of us think that checking privileges means you can deposit your earnings and pay bills, but otherwise your money is just sitting there.

If you’re in that group, it may literally pay to learn about interest-bearing checking accounts, which allow that money in the bank to grow a bit as you conduct your daily transactions. Typically more flexible than savings accounts, interest-bearing checking can give you a nice little financial boost if they’re a good fit for you. In some cases, they may not sync up with your money style.

So let’s take a closer look at these interest-bearing checking accounts:

•   What they are

•   How interest-bearing checking accounts work

•   How much interest you could earn

•   The pros and cons of having one of these accounts.

What Is an Interest Checking Account?

Whether it’s called an interest-bearing checking account or simply an interest checking account, this is a type of checking account where the account holder can earn interest. The interest rate may not be amazingly high: Currently, it is typically between 0.50% and 1% APY, or annual percentage yield, which is the real rate one earns when compounding interest kicks in. (Occasionally, APYs of 3% or 4% pop up.) Even at the lower range, the interest accrued is better than nothing. Honestly, who doesn’t want to earn more interest?

There may, however, be a catch: Although the account will pay an APY, accountholders may be required to pay monthly maintenance fees or maintain a certain account balance.

Then there’s the matter of balance requirements: You will probably need to keep more in an interest checking account, though the exact amount will differ by financial institution. However, one recent survey found that on average, customers needed to keep just over $505 in an interest checking account to avoid monthly fees, which is $343 more than the average minimum deposit needed in a non-interest checking account.

You might also have to pay a monthly account fee; again, it depends on the bank you choose. Recent research found that interest checking accounts had an average monthly fee of $16.35 versus non interest checking accounts average of $5.08. It’s worthwhile to do the math to make sure the interest you earn will offset the fees you pay.

One more point: In many cases, interest checking accounts earn less interest compared to savings accounts.

However, a checking account has added flexibility that may be beneficial (we’re referring to things like unlimited transactions and debit-card and check-writing features).

How Do Interest-Bearing Checking Accounts Work?

These types of accounts work in a similar way to other kinds of checking accounts. Account holders can make deposits at ATMs, online, by direct deposit, or at branch locations depending on the financial institution.

As for withdrawals, account holders can make bank transfers, withdraw cash from an ATM, write a check, use bill pay, or pay for purchases with a debit card. The only difference is that, instead of earning no money on your balance, you will accrue some interest, usually on a monthly basis.

What Are Some Common Account Requirements for Interest-Bearing Checking Accounts

When it comes to opening an interest-bearing checking account, there may be some requirements to wrangle. Keep the following factors in mind:

•   Minimum-balance and other account requirements: When you open an account, some financial institutions may require a minimum initial deposit. Current offers for interest-bearing checking range from zero dollars to $2,500 or higher as a minimum deposit. Shop around to find the right account for your needs.

   Plus, as mentioned above, you may need to maintain a certain balance in order to avoid fees. There may also be other rules such as the amount of transactions you can make on your debit card.

•   Fees: Some interest checking accounts may charge monthly fees, as we described earlier in this article, which could eat into the interest you earn. You may have to keep a higher balance in your account to avoid fees. Other fees to consider are overdraft fees, and whether you’ll need to pay third-party network fees to access certain ATMs.

•   Application requirements: Depending on the financial institution, you may be required to submit documents such as your Social Security number, proof of address, and government-issued photo ID. If you want to open a checking account with a credit union, you’ll most likely need to become a member.

Ready for a Better Banking Experience?

Open a SoFi Checking and Savings Account and start earning 1.25% APY on your cash!


Advantages and Disadvantages of Interest-Bearing Checking Accounts

An interest checking account may not be the best option for you. Consider the following advantages and disadvantages before opening an account:

•   PRO: You’ll earn interest Most traditional checking accounts won’t pay you any interest, but with an interest-bearing one, you’ll earn high interest. That means your money will help you earn some money while it’s sitting in the account. Typical APYs currently range from 0.50% to 1.25%.

•   CON: You may have to meet certain requirements Though there are some interest checking accounts that don’t have minimum balance requirements or monthly fees, some do. That means you could be on the hook for a monthly fee if you can’t meet account requirements. In some cases, these fees could negate the amount you earn in interest.

•   PRO: You’ll have more flexibility Checking accounts tend to not have transaction limits like you would with savings accounts or money market accounts. Plus, you can use checks and a debit card, offering you more flexibility to access your hard earned money.

•   CON: You may not get a high interest rate The interest you earn on a checking account tends to be lower compared to ones you earn from a high-yield savings account or money market account. But there are definitely exceptions to the rule: Some banks have offered as much as 2%, 3%, or even 4% on interest checking accounts, so it can truly pay to shop around and see if you can nab one of those deals.

How Much Interest Does a Checking Account Pay?

The truth is, checking account interest rates will vary depending on the type of account and the financial institution. On average, banks offer an APY of 0.03%. There are high-yield checking accounts that could pay more, but these rates are generally still lower than what you could earn with a savings account. If you hunt, you might find a better rate, but you will probably need to invest a bit of time and effort to find the accounts with rates near 2% or higher.

Sure, you can consider keeping a higher balance, but these rates probably won’t earn as much as you can compared to other types of accounts. If your main goal is to earn as much interest in your liquid cash reserves, you may want to consider putting more towards a savings account or investments.

Where Can I Get an Interest Checking Account?

You can open an interest checking account at most financial institutions, including traditional and online banks, as well as credit unions. As mentioned before, you may be required to become a member of the credit union you want to open a checking account with.

When shopping around, look beyond interest rates. Other equally important factors to consider are:

•   Account features (access to your funds, for instance; when the interest accrues)

•   Account-holder benefits (are there other perks to being an account-holder?)

•   ATM, overdraft, and other fees

•   Minimum balance requirements (how much do you need to keep on deposit to earn interest?).

Is It Worth It to Get an Interest-Bearing Checking Account?

Thinking carefully about your financial situation and goals should help you determine whether it’s worth getting an interest bearing checking account. For those who want to keep a decent amount of money in a checking account to ensure bills and daily transactions are taken care of, it might be worth considering. Why not earn a bit of interest if you can find an account that doesn’t charge fees?

However, if you’re interested in having a stash of cash available for short-term or medium-term savings goals — as in, you’re not planning on making frequent withdrawals — then an online bank account or a similar account at a bricks-and-mortar bank may be the better choice. If your goal is to save for long-term goals like retirement or a college fund for your child, then an investment account could be the way to go.

The Takeaway

An interest-bearing checking account may be worth it if you’re looking for an account to conduct daily transactions with the ability to grow your money a bit. It’s important to look through the fine print to see if there are any minimum balance requirements and what the fees are. You also need to decide whether you’re willing to keep a certain balance to earn interest. Comparing the potential interest to be earned with any fees that may be charged is a vital step before applying for an interest checking account.

We can give you one easy, money-smart option: SoFi Checking and Savings. If you sign up with direct deposit, you’ll earn a very competitive 2.00% APY. What’s more, we’re fee-free: No minimum-balance or monthly fees, and we’ll cover $50 in overdraft without charging you.

Come see how much better banking can be with SoFi.

FAQ

Is an interest-bearing checking account worth it?

An interest-bearing account is a smart way to earn a bit of interest on your checking funds if you can easily meet account requirements. For instance, if you know you’ll be able to keep a certain amount on deposit to earn interest, then the account is worth considering.

Who has interest-bearing checking accounts?

Most financial institutions offer interest bearing checking accounts, including online banks, traditional brick and mortar banks, and credit unions.

What is the benefit of having an interest-bearing checking account?

The main benefit of an interest checking account is that account holders can grow their money while having flexibility in their daily financial transactions.


Photo credit: iStock/FG Trade

SoFi members with direct deposit can earn up to 2.00% annual percentage yield (APY) interest on all account balances in their Checking and Savings accounts (including Vaults). Members without direct deposit will earn 1.00% APY on all account balances in Checking and Savings (including Vaults). Interest rates are variable and subject to change at any time. Rate of 2.00% APY is current as of 08/12/2022. Additional information can be found at http://www.sofi.com/legal/banking-rate-sheet
SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2022 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
Any SoFi member who receives $1,000 or more in qualifying direct deposits into their SoFi Money account over the preceding 30 days will be eligible for Overdraft Coverage. Overdraft coverage only applies to SoFi Money accounts and is currently unavailable for Samsung Money by SoFi accounts. Members with a prior history of non-repayment of negative balances for SoFi Money are also ineligible for Overdraft Coverage.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
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Reasons Why You Would Put Money Into a Savings Account

Putting Money in a Savings Account: What You Should Know

Savings accounts are designed to hold money that you don’t plan to spend right away. You can use them to save for short-term goals or long-term goals and most savings accounts pay interest on deposits, helping you to grow your money.

If you’re new to banking, you might have questions like:

•   Is a savings account necessary if you have a checking account?

•   Why would you put money in a savings account?

•   Is it worth putting money in a savings account?

•   What is the best savings account to have?

Understanding the basics of how savings accounts work matters for making the most of your money. So here, we’ll spell out what exactly a savings account is and how it works, the pros and cons of savings accounts, the various kinds of savings accounts, and how to open one if you feel it’s right for you.

What Is a Savings Account?

A savings account is a deposit account offered by banks, credit unions and non-bank fintech companies (like Chime or Current). Savings accounts are designed to hold money you want to save versus checking accounts, which are meant to hold money you plan to spend.

In terms of features and benefits, here’s what makes a savings account unique:

•   Interest-bearing. Banks and other financial institutions can pay savers interest on their deposits. Online banks like SoFi tend to offer a higher annual percentage yield (APY) than brick-and-mortar banks. For example, at this writing, SoFi was offering 2.00% APY which was 41 times the national average.

•   Withdrawal limits. Savings accounts are meant for saving, not spending. Banks can impose monthly withdrawal limits and charge an excess withdrawal fee if you go over that limit. For instance, the Federal Reserve Board had limited withdrawals and transfers from a savings account to six per month. This guideline however was suspended in 2020 due to the COVID-19 pandemic, but it could be reinstated.

•   Low minimums. Opening a savings account may only require as little as $1 to get started, though the usual range is $25 to $100. The minimum deposit may be higher at brick-and-mortar banks.

•   Automated growth. Savings accounts make it easy to grow your balance through automatic deposits. You can schedule part of your paycheck to be deposited to savings, for example, or set up recurring transfers from another bank account.

How Savings Accounts Work

Savings accounts work by letting you deposit money and then withdrawing it later while earning interest in the meantime. Here’s an example of how to spend (and save) with a savings account.

Say you want to open a new bank account to hold your emergency fund. Your savings goal is $5,000. You open a new account online that has no minimum balance requirements, no overdraft fees, and no monthly fees.

You deposit $100 into your account initially and set up an automatic deposit of $200 per month after you are paid. If the account offers a 1.00% APY, after one year, you’d have $2,514.04 in savings. Of that amount, you’ve deposited $2,500 and the remaining $14.04 is the interest earned.

So is it worth putting money in a savings account? It can be, if you’re earning a high APY on your balances. The more you deposit and the more interest you can earn, the faster your money can grow over time. Just make sure you don’t wind up having that interest eroded by fees.

Ready for a Better Banking Experience?

Open a SoFi Checking and Savings Account and start earning 1.25% APY on your cash!


Benefits of Savings Accounts

Why should I put my money in a savings account? It’s a good question to ask, since there are other places you keep your money instead. Here, we’ll share the advantages of having at least one savings account.

Earn Interest

The main reason to consider a savings account is the opportunity to earn interest. Think of the interest you earn on savings as a reward for keeping your money in the bank instead of spending it.

If you’re looking for the best savings account interest rate, online banks are a good place to start. Online banks tend to have lower overhead costs than traditional banks so they can pass that savings on to customers in the form of a higher APY on deposits. You can look for what are called high-yield savings accounts or growth savings accounts to help you maximize your interest earnings.

Fund Specific Goals

Savings accounts can help you fund different goals and dreams. For example, you might be interested in opening a savings account for a baby if you plan to grow your family. Or you may want to save for a vacation or even a down payment on a home.

One of the advantages of having multiple savings accounts is that you can keep funds for each goal separate. This can make it easier to decide how much to allocate toward each goal and track your progress over time.

Convenient Access

Savings accounts are highly liquid since the money that’s in them is easily accessible. You can connect them to other bank accounts in order to transfer funds back and forth. Or you might be able to access savings using an ATM card, debit card, or even checks if your bank offers those features. You’re also not locked into the account the way you might be with a CD account, which can impose a penalty if you withdraw money before it matures.

Security

If you open your savings account at a bank that has FDIC insurance or a credit union that’s insured by NCUA (and most of these financial institutions do carry this insurance), you are insured for up to $250,000 per depositor, per bank, per account category.

Disadvantages of Savings Accounts

There are lots of benefits to keep in mind when thinking about why you would put money into a savings account. But there are a few drawbacks to consider as well.

Low Rates

Savings account interest rates can vary from bank to bank. Again, online banks may offer the highest rates for savers, but rates can change over time. This is because banks will often adjust savings rates following movements in the federal funds rate. So it’s possible that you might find a savings account with a great rate initially, only to see that rate move up or down over time. For this reason, it’s a good idea to keep an eye on that APY you’re earning.

Withdrawal Limits

Savings accounts can offer convenient access, but there may be limits on how often you can make withdrawals. As mentioned, banks typically can charge an excess withdrawal fee if you withdraw money from savings more than six times per month, though this was suspended in 2020 due to the coronavirus pandemic. If you get in the habit of making excess withdrawals it can be costly. And in some cases, the bank might convert your savings account to a checking account or require you to close it.

Slower Growth

A savings account can grow your money, but you may see better returns by keeping money elsewhere. For example, you could open an investment account and use some of the excess money you have in savings to buy stocks, cryptocurrency, exchange-traded funds (ETFs) or IPOs. Over time, you may see much higher returns from your investments than you would from your savings.

How to Open a Savings Account

Opening a savings account isn’t difficult; most banks allow you to open checking and savings online in just a few minutes. It will go especially quickly if you have the documentation ready before you start the process. In many cases, you’ll need the following:

•   Your contact information

•   A driver’s license, passport, or other form of acceptable government photo ID

•   Social Security number or an ITIN number

•   Date of birth

•   Address (you may well need a utility bill to verify this)

Before you open an account, it’s important to do some research first. Here are some of the things to consider when choosing a savings account:

•   Minimum deposit requirements

•   Minimum balance requirements

•   Monthly service fees, if any

•   Interest rate you could earn

•   How you can access and manage your money (i.e. online banking, mobile app, ATM card, etc.)

•   Monthly withdrawal limits, if any

•   Added features or benefits, if any

Once you decide on an account, you can move on to account opening. You’ll need to link an existing bank account to make your first deposit if you’re saving with a brand new bank, or you could bring cash or a check if you go with a bricks-and-mortar bank. You’ll also need to decide how much of your paycheck you want to save if you’re setting up recurring deposits.

Alternatives to Savings Accounts

A savings account isn’t the only place to keep your money. Banks can offer other options for deposit accounts, including ones that earn interest. If you’re looking for other ways to hold funds, here are three possibilities.

Interest Checking

Interest checking accounts, also known as high-yield checking accounts, work like regular checking accounts but they also pay interest on balances the way a savings account might. They may require a minimum balance though.

Certificate of Deposit Account (CD)

A CD account is a time-deposit account in which you agree to save money for a set period of time. The balance earns interest, and, when the CD matures, you can withdraw the initial deposit and the interest that accrued or start a new CD. These accounts can be good for saving money you know you won’t need to spend in the near term. One thing to keep in mind, however, is that if you withdraw money before the CD matures, you will likely pay a penalty.

Money Market Account (MMA)

A money market account is a type of deposit account that combines features of checking and savings accounts. For example, the account may earn interest, and you might be able to write checks or make withdrawals using a debit card. But monthly limits on withdrawals may apply.

Worth noting: Some money market accounts can offer a higher APY than savings accounts, though you may have to make a higher minimum deposit or maintain a higher minimum balance to earn that rate.

The Takeaway

Is a savings account necessary? The answer can depend on your financial goals and how you prefer to manage your money. But a savings account can be a useful place to keep money that you plan to use in the future and earn a bit of interest while it sits. It can also be especially convenient if linked to your checking account, so you can set up automatic deductions when you are paid. This technique can seamlessly whisk away money before you spend it.

If you’re interested in finding the right checking and savings option, consider SoFi Checking and Savings If offers a competitive 2.00% APY, and no monthly, minimum-balance, or overdraft fees. So your money makes more money, faster!

Ready to bank smarter with SoFi?

FAQ

What are the requirements before opening a savings account?

Banks usually ask to verify your identity before opening a savings account and will collect your Social Security number, driver’s license or passport number, and other credentials. You’ll also need to make a minimum deposit to fund your account, though some banks will allow you to do this after the account is open. This will require an account number and routing number for an existing bank account that you’ll transfer funds from, cash, or a check.

Is the interest accrued from a savings account worth it?

Earning interest on a savings account is worth it if you’re getting a decent rate. Online banks can offer higher APYs to savers than traditional banks. But earning even some interest is better than nothing if the alternative is keeping your savings in a piggy bank or under the mattress.

Can you withdraw from a savings account anytime?

Banks usually don’t restrict when you can withdraw money from a savings account, though they may limit how often you can do so. It’s not uncommon for banks to limit you to six withdrawals per month and charge a fee if you go over that limit. However, this policy was suspended due to the COVID-19 pandemic.


Photo credit: iStock/Povozniuk

SoFi members with direct deposit can earn up to 2.00% annual percentage yield (APY) interest on all account balances in their Checking and Savings accounts (including Vaults). Members without direct deposit will earn 1.00% APY on all account balances in Checking and Savings (including Vaults). Interest rates are variable and subject to change at any time. Rate of 2.00% APY is current as of 08/12/2022. Additional information can be found at http://www.sofi.com/legal/banking-rate-sheet
SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2022 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
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Can I Open a Bank Account for Someone Else?

Can You Open a Bank Account for Someone Else?

The answer to the question, “Can I open a bank account for someone else?” is yes, it’s possible, but there is a condition. In order to open a bank account for someone else, you need to also be an account holder or have a certain form of access. For example, you can either open an account for your child or someone like your spouse or business partner with whom you share financial interests. You may also be able to open an account for someone who has deemed you their power of attorney. But, in most cases, the other party has to be present during the account opening process.

So, if you’re wondering how to open a bank account for someone else, here’s what you need to know about the ins and outs of the process. We’ll delve into:

•   How do bank accounts work?

•   In which situations you can open an account for someone else

•   What is required to open an account for another person

Let’s take a closer look.

How Do Bank Accounts Work?

Bank accounts act as a vessel to park and often use your money. Typically, banks, credit unions, and other financial institutions offer several different types of accounts. Each works in its own way. Some standard offerings include:

•   Checking accounts. A checking account allows the account holder to deposit funds. Then, they can use the funds to complete everyday transactions like paying bills, writing checks, or shopping with a debit card. While some accounts earn interest, it is often a tiny percentage.

•   Savings accounts. Unlike checking accounts, savings accounts are designed to hold and grow your money for an extended period. You can then use this money in the future or for unexpected expenses. Savings accounts often earn interest. Federal law may restrict the number of withdrawals you can take out of a savings account, though this limitation was suspended due to the COVID-19 pandemic.

•   Money market accounts. Similar to savings accounts, money market accounts earn interest. Some money market accounts may have a debit card and check-writing features. Also, the law usually restricts the number of withdrawals you can make from this type of account.

Is It Possible to Open a Bank Account for Someone Else?

Now, for the question of whether you can open a bank account for someone else. There are three circumstances in which banks allow you to open an account for someone else. Either you’re opening the account for a minor, a joint account holder, or you hold power of attorney for another individual. Here’s a bit more detail on each of these situations.

•   Bank account for a minor. Minors cannot open a bank account according to federal law. Therefore, if you want to begin teaching your kids the concept of saving early on, you can open an account for a child. You do so by opening a custodial account or joint account. With a custodial account, the child owns the funds within the account, but the parent manages them until the child reaches the age of maturity, which is usually 18 years old. With a joint account, you and your child both have access to the account. As the parent, though, you can monitor the activity within the account, like setting withdrawal limits.

•   Bank account for a co-owner. Your other option is to become a joint or co-owner of a bank account. When you set up a joint bank account, you and the other co-owner have access to the funds. In many cases, you will be able to make deposits and withdrawals at your discretion; in others, you will need the other account holder’s approval to conduct transactions. Usually, you open a joint account with someone you have already established a financial relationship with, like a spouse or other family member. Once you open the account, you can go about managing the joint bank account together.

•   Power of attorney. When someone gives you a power of attorney, you can manage their bank accounts on their behalf. However, you must keep your own money separate from their accounts. When opening the account, the bank usually requires a legal power of attorney document and a photo ID. You may also need to fill out the bank’s power of attorney form. Also, the account will usually be in the other party’s name, but you will have authority over the account.

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Steps to Open a Bank Account for Someone Else

There are typical steps for starting a bank account, though every bank, credit union, or other financial institution may have a slightly different process. Although the details may vary, here are some common steps you will usually take when opening a new bank account for someone else.

Valid Proof of Identity

The first step to opening a bank account for someone else is to provide a valid proof of identification. When you’re opening an account for a minor, you and your child must be present during the account opening process. You and your child will also have to provide a form of identification such as:

•   U.S. driver’s license

•   Social Security card or ITIN

•   Birth certificate

•   Immunization record

•   School photo ID

•   Passport/alien ID

When you’re opening an account with someone else who is not a minor, both parties usually must be present to open the account. Also, you will have to provide the same forms of identification. Some common forms of identification include:

•   U.S. driver’s license

•   U.S. state ID

•   Passport

If you’re a power of attorney for someone else, you will also need to bring your notarized power of attorney legal document. Depending on the bank, they may also require you to fill out a power of attorney form to accompany the rest of the documentation.

Basic Information

In addition to showing valid proof of identification, you will likely need to fill out an application. On the application, the bank will request personal information from each account holder. This information can include:

•   Social Security number or Tax ID (for business accounts)

•   Utility bill to verify current address

•   Name

•   Address

•   Phone number

Initial Deposit

Some banks may also require an initial minimum deposit or a monthly minimum balance to keep the account active. This means that you must deposit a certain amount to open the account and/or have a certain amount of money in the account to maintain it. Typically, banks require between $25 and $100 to open an account. However, some institutions may have no deposit requirement.

So, if this may be a hurdle for you, ask your bank about its requirements before starting the application process. It’s a good idea to know upfront if you’ll need to deposit funds to activate it.

Things to Consider When Opening a Bank Account for Someone Else

We’ve established that opening a bank account for someone else is usually the same as starting a joint, or shared, account. Now, opening a bank account for someone else may involve a family member; say, your goal might be to enhance your child’s financial literacy or combine finances with your spouse. In these cases, you probably feel pretty sure the other party is trustworthy.

But what about opening an account for someone else who is a friend, distant relative, or business associate? Consider these points before you open a bank account for someone else.

•   Limited privacy. When you combine your finances with another individual, you forgo your privacy when managing your money individually. For example, the other account holder can see all of the transactions within the account and know how you spend your money. So, if this raises some concerns, you may want to reconsider a joint account while you build trust with that individual.

•   Shared financial responsibilities. Opening an account with someone else means you may now need to share financial responsibilities such as paying bills or saving for joint retirement (as well as any account fees). This can work out well if both parties contribute equality. But, if the contributions or withdrawals are relatively uneven, this financial partnership could be harmful. Therefore, before opening a bank account for someone else, discuss each party’s contributions and expectations for managing the account.

•   Use multiple accounts. If the idea of merging financial lives doesn’t suit you, you might want to continue managing your money separately, and use the joint account for a few shared expenses. This way, you can keep your privacy while managing your money with someone else. There is no one-size-fits-all solution. Using multiple accounts may be a great solution, especially for folks helping their children manage their money. This way, you can keep most of your funds separate while keeping an eye on the child’s spending habits. Similarly, if you are starting a business with a colleague, you may want one shared account for certain income and expenses, while the rest of your funds stay separate. See what works for you and the other person involved.

The Takeaway

Yes, you can open a bank account for someone else. However, they will usually have to be aware and participate in the account opening process. But, before you open an account on someone else’s behalf, make sure you understand the financial implication of this decision, such as forgoing your privacy. While the process is fairly straightforward, you do want to be sure the parties involved understand the ground rules and are comfortable with the shared access and responsibility.

Whichever path you take (shared or separate accounts), you can find top-notch banking options with SoFi Checking and Savings. We offer a super-competitive 2.00% APY on accounts when you set up direct deposit, and we don’t charge you any of the usual fees. That means no monthly, no minimum-balance, and no overdraft (up to $50) fees. So your money earns more and doesn’t get whittled away by charges.

Ready for better banking? Sign up for a SoFi account today.

FAQ

Can I open a bank account on behalf of someone else?

Yes, you can typically open an account for a minor or joint account holder. However, both parties will need to be present to open the account. It’s also possible to open an account on behalf of someone else if you’re their power of attorney.

What do I need when opening a bank account for someone else?

When opening a bank account for someone else, you and the other party must usually be present. You and the other applicant will also need to provide valid proof of identification, as well as personal information like your Social Security number and address.

Can I open a bank account for a younger sibling?

Yes, you can open a bank account for younger siblings as long as they are over 18 years old and participate in the opening process. If they are under 18, they may need a parent or legal guardian to open the account with them instead.


Photo credit: iStock/kate_sept2004

SoFi members with direct deposit can earn up to 2.00% annual percentage yield (APY) interest on all account balances in their Checking and Savings accounts (including Vaults). Members without direct deposit will earn 1.00% APY on all account balances in Checking and Savings (including Vaults). Interest rates are variable and subject to change at any time. Rate of 2.00% APY is current as of 08/12/2022. Additional information can be found at http://www.sofi.com/legal/banking-rate-sheet
SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2022 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
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How to Open a Bank Account For a Minor

Guide to Opening a Bank Account for a Minor

Is it time for a young person in your life to start understanding how banking works? Do they get an allowance? Are they raking in some cash for odd jobs? Or perhaps they are just plain curious about how money works, or you’re eager to get them in the habit of saving?

Whatever the trigger, there are plenty of benefits a kid can reap from learning how to bank before they leave the nest. Gaining financial literacy and responsibility is a very good thing. Fortunately, an array of banks and credit unions offer minor accounts designed for exactly this purpose.

Because most state laws and corporate policies don’t enter into contracts with minors — and opening a bank account is a kind of contract — most banks require a child to have an adult as a joint account owner.

That’s where you come in. It’s tempting to simply open an account for your young one at the place you do your banking. But it can also be worth comparing accounts to see which institution offers the best fees, rates, and other features specifically for minor accounts.

To help with your search, here are answers to several frequently asked questions regarding opening a bank account for a minor.

What is a Bank Account?

Much like regular bank accounts, minor bank accounts provide convenience, safety, and flexibility when it comes to saving and spending money.

For younger children, saving money in a safe place may be the primary reason to open a minor bank account. Sure, that piggy bank you bought them is cute, but it’s not exactly Fort Knox. A bank account is secure, and the funds deposited will likely earn a bit of interest.

Teens may find the same benefits to a savings account. However, they may also be excited to test-drive the checking and debit-card features that minor checking accounts offer. These accounts can be a valuable learning tool in terms of budgeting. They will become familiar with how money flows in and out of an account; they may even overdraw their account for the first time and learn from it.

What Do I Need to Open Up a Bank Account for My Child?

As you shop around for an account, you’ll see that each financial institution has its own rules regarding documentation needed to open a bank account for a minor. In most cases, whether you are opening an account online or in person, you will need the following, in addition to a sum of money (often between zero and $25) to open the account:

Driver’s License

Government-issued photo identification is a gold standard for proving you are who you say you are. If you don’t have a driver’s license, a passport will likely be acceptable.

Social Security Card

You may or may not need the actual card in front of you; just knowing your Social Security number should do the trick.

Child’s Social Security Card

Many people apply for their child’s Social Security number at birth; it’s an important thing to have for obtaining medical coverage or government services. Have those nine digits at the ready.

Child’s Birth Certificate

The bank will want to document that your child is who you say they are. That birth certificate is an important way to do just that.

Proof of Address

A typical way to authenticate your address is with a recent utility bill. If you don’t have a hard copy of your bill lying around, you should be able to easily download a bill from your provider’s online portal.

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Types of Bank Accounts for Children

As with standard banking, checking and savings are the most common types of accounts for minors. There are, however, some special aspects of both types of accounts when the child is under age 18. These accounts can help teach good money management and support your family savings efforts. Let’s take a closer look at how they work.

Checking Accounts for Children

Minor checking accounts are common offerings at banks. Most accounts are designed for kids ages 13 to 17; in other words, kids who are a little older and ready to learn the budgeting skills needed to balance a checking account. Some teen checking accounts offer interest, and the best of the bunch offer very low or no fees. This is important since teens are unlikely to carry large balances in their checking or savings accounts. You don’t want fees eroding or even erasing their money.

Savings Accounts for Children

Lots of banks offer special savings accounts for kids. Age restrictions vary, but these may be designed for younger children (the 12-and-under set). There are even savings accounts designed for babies. Check at a couple of banks you are considering for this kind of account and compare offerings.

Many of these accounts have competitive interest rates Some, however, require a minimum deposit to earn those rates. In addition to looking into those details, also see what kind of parental controls are available. These typically allow you to monitor the account and control access. This can be a good thing to have in place in case your child decides to go splurge on videogames or the like.

Recommended: How Does a Savings Account Work?

What to Look for in Bank Accounts for Kids

As you look for the best checking and savings accounts for kids, here are a few things to keep in mind.

Interest. As mentioned before, you may want to compare interest rates on a number of children’s savings accounts. Some are quite competitive but may come with other requirements.

Fees. You want a minor banking account that doesn’t charge the same types of fees you find on an adult account. Many banks waive an application fee and the monthly maintenance fee. But debit card and ATM fees may still apply. Because an adult is the joint account owner, sometimes overdraft and other fees are eased. Be sure to check specific fees on the minor account carefully.

Balance Requirements. Sure, you’ll start the account with an initial deposit, but after that, how much do you need to keep at the bank? Kids’ accounts may require a minimum balance to avoid monthly fees or earn the best interest rates.

Aging Out of the Account. Many banks convert kids’ accounts to standard accounts once the child turns 18. This often takes both adults and the account holder by surprise. The conversion can mean adult account fees, minimum balance requirements, overdraft fees, and changes in withdrawal and deposit protocols. With savings accounts, it may mean a change in interest rates and balance requirements.

On the other hand, some banks allow children to keep their minor account well into their twenties. And there may be special considerations for kids who turn 18 and are students. Be sure to understand what your child’s account allows.

Apps and Financial Literacy Features. Many minor accounts offer apps that help you monitor the account and your child’s activities. Some even go so far as to allow you to assign chores and make the decided-upon payments. In addition, you may be able to get a preloaded debit card for your child, which can help teach budgeting in a very hands-on way. When all the money’s gone, your child will likely understand the value of careful tracking expenses.

Notifications. Many banks allow you to sign up for automatic notifications whenever a transaction has taken place on the minor’s account. This not only lets you know that your child may be overspending but you may also be alerted to any suspicious account activity.

Tax Implications

Sometimes, a minor’s account has a small amount of money that slowly accrues as your child deposits birthday money and some summer-job earnings. Other times, a budding entrepreneur or devoted saver might have a higher balance. In either case, interest income on your child’s account may be subject to taxes, specifically what’s known as the “kiddie tax,” which applies to children under 19 and full-time college students under the age of 24. Any unearned income over $2,100 is taxed at the rates that apply to trusts and estates. This is to avoid parents putting large amounts of money in their children’s name and likely lower tax rate.

In addition, funds in your child’s bank accounts can affect their financial aid awards. Because money in a child’s name is weighted more heavily in financial aid formulas than it is for parents’ accounts, you may find high bank account balances work against your student when it comes time to apply for financial aid.

Now that you understand the ins and outs of opening an account for a minor, you can take the next step and figure out the best place for your child to start banking. Congrats on taking this step to foster a healthy financial life for your child.

Open a Bank Account With SoFi

While you’re thinking about a minor bank account, why not take a fresh look at your own banking needs?

If you want an account where you can earn interest, spend, and save all in one place, check out SoFi Checking and Savings. We offer over 41 times the average checking account interest rate; sign up for direct deposit, and you’ll earn 2.00% APY. Plus, you won’t pay account fees and you’ll have access to 55,000+ fee-free ATMs worldwide.

See how smart and simple banking with SoFi can be.


Photo credit: iStock/Riska

SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2022 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
SoFi members with direct deposit can earn up to 2.00% annual percentage yield (APY) interest on all account balances in their Checking and Savings accounts (including Vaults). Members without direct deposit will earn 1.00% APY on all account balances in Checking and Savings (including Vaults). Interest rates are variable and subject to change at any time. Rate of 2.00% APY is current as of 08/12/2022. Additional information can be found at http://www.sofi.com/legal/banking-rate-sheet
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
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