What Is Share Draft Accounts?
A share draft account is a type of transactional deposit account offered by credit unions that functions similarly to a traditional checking accounts from banks. As a core component of banking services, share draft accounts allow members to make deposits, perform withdrawals, write negotiable orders (known as "share drafts" or checks), and typically use a debit cards for purchases and cash access. Unlike bank customers, individuals with a share draft account are considered members and partial owners of the credit union, reflecting the cooperative structure of these financial institutions. The term "share" refers to a member's ownership stake, while "draft" is another word for a check or order to pay. Share draft accounts are protected by federal insurance.5
History and Origin
The concept of share draft accounts emerged in the 1970s as credit unions sought to offer transactional services competitive with commercial banks. Historically, credit unions primarily focused on savings and loans, but the evolving financial landscape created demand for more flexible payment mechanisms. The introduction of share draft accounts allowed credit unions to provide their members with checking-like capabilities, enhancing their utility as primary financial service providers. Federal regulatory bodies, such as the National Credit Union Administration (NCUA), established guidelines for the operation of share draft programs, ensuring their economic and operational feasibility within the cooperative structure of credit unions.4
Key Takeaways
- Share draft accounts are checking-style accounts offered by credit unions.
- They allow members to write checks, use debit cards, and manage everyday transactions.
- Unlike bank checking accounts, share draft accounts may earn dividends instead of interest.
- These accounts are federally insured by the National Credit Union Share Insurance Fund (NCUSIF).
- Members with share draft accounts are considered part-owners of the credit union, underscoring its cooperative nature.
Interpreting Share Draft Accounts
Understanding share draft accounts involves recognizing their core functionality as a highly liquid and accessible transactional tool within the credit union system. While termed differently from bank accounts, their practical application for daily financial management is largely identical to checking accounts. The primary distinction lies in the ownership structure: money held in a share draft account represents member shares in the credit union. Many share draft accounts offer competitive dividend rates, which can be an advantage over non-interest-bearing checking accounts offered by some banks. The terms and conditions, including any minimum balance requirements or monthly fees, are set by individual credit unions and should be reviewed carefully.
Hypothetical Example
Consider a new member, Sarah, joining a local credit unions. After opening her initial savings accounts, she decides to open a share draft account for her day-to-day expenses. Her employer sets up direct deposits into this account. Throughout the month, Sarah uses her associated debit cards for groceries and online purchases. She also writes a few share drafts (checks) to pay her rent and utility bills. When her account balance runs low, she can easily transfer funds from her savings account to her share draft account through online banking, ensuring she avoids any overdraft protection fees. At the end of the quarter, her share draft account earns a small dividend, reflecting the credit union's profitability.
Practical Applications
Share draft accounts serve as the primary transactional hub for millions of credit unions members, facilitating a wide array of financial activities. These accounts are extensively used for routine spending, bill payments via physical checks or Automated Clearing House (ACH) transfers, and cash access through ATMs or teller transactions. They are an integral part of modern personal finance, enabling seamless electronic funds transfer (EFT) and direct payroll deposits. From a regulatory standpoint, share draft accounts are classified as "transaction accounts" by the Federal Reserve Board under Regulation D, which historically imposed reserve requirements on depository institutions, although these requirements were reduced to zero in 2020.3
Limitations and Criticisms
While share draft accounts offer numerous benefits, potential limitations or criticisms should be considered. Historically, one aspect that differentiated credit unions from banks was their limited branch networks compared to larger commercial banks, which could impact convenience for withdrawals or deposits outside of a credit union's specific footprint. However, the rise of shared branching networks and widespread ATM access, coupled with robust online banking and mobile apps, has largely mitigated this concern for many members. Another point to note is that while many share draft accounts offer competitive interest rates in the form of dividends, some basic versions may not yield any returns on balances. The National Credit Union Administration (NCUA) outlines the types of accounts insured, including share draft accounts, ensuring protection against losses in case of a federally insured credit union's failure, up to the standard maximum share insurance amount.2
Share Draft Accounts vs. Checking Accounts
The distinction between share draft accounts and checking accounts is primarily semantic and structural rather than functional. Both types of accounts serve as transactional hubs for everyday financial activities, allowing for check writing, debit card usage, and electronic transfers. The key difference lies in the nature of the financial institution offering them. Share draft accounts are exclusive to credit unions, which are non-profit, member-owned cooperatives. Funds in a share draft account are technically considered "shares" representing a member's ownership stake, and any earnings are typically paid as dividends. Conversely, checking accounts are offered by traditional for-profit banks, where account holders are customers rather than owners, and earnings are referred to as interest.
FAQs
Are share draft accounts insured?
Yes, share draft accounts at federally insured credit unions are insured by the National Credit Union Share Insurance Fund (NCUSIF) for up to $250,000 per member, per ownership category. This protection is similar to the FDIC insurance for bank accounts.1
Do share draft accounts earn interest?
Many share draft accounts offer earnings, but these are typically referred to as dividends rather than interest, reflecting the cooperative ownership structure of credit unions. The rates can vary and may be competitive with or exceed those of some traditional checking accounts.
Can I write checks from a share draft account?
Yes, you can write checks, often called "share drafts," from a share draft account. These function exactly like personal checks from a bank, allowing you to make payments or withdrawals.
How do I access funds in a share draft account?
Funds in a share draft account can be accessed through various methods, including writing share drafts (checks), using a debit cards at ATMs or for point-of-sale purchases, setting up Automated Clearing House (ACH) transfers, or conducting teller transactions at a credit union branch or shared branch location.
Are there fees associated with share draft accounts?
Fees for share draft accounts vary by credit unions. Many credit unions offer share draft accounts with no monthly maintenance fees or low minimum balance requirements, especially compared to some traditional bank checking accounts. However, specific fees for services like overdraft protection or out-of-network ATM usage may apply.