What Is a Share Draft?
A share draft is a type of draft, which credit unions use, as a way to access funds in individual accounts. Shares represent partial ownership in a credit union, and credit union members (shareholders) write drafts (checks) as a way to access the value of their partial ownership (shares). A share draft is a type of draft, which credit unions use, as a way to access funds in individual accounts. Share draft accounts at credit unions are the equivalent of personal checking accounts at banks. What's more, share draft accounts usually carry neither monthly fees nor minimum balance requirements, unlike many bank checking accounts.
Breaking Down Share Draft
A credit union functions differently than a conventional bank. In a credit union, every member is also a partial owner. Because credit unions are cooperatively owned, members do not make deposits, but rather purchase shares. Shares do not earn interest, but instead, earn dividends. (A dividend is a distribution of a portion of an organization's earnings, decided by the board of directors or other managerial entity, paid to a class of its shareholders.)
What's more, share draft accounts usually carry neither monthly fees nor minimum balance requirements, unlike many bank checking accounts. In traditional commercial banking, service charges help generate income from accounts that don't bring in enough interest revenue to cover the bank's expenses. Charging fees when customers fail to maintain a minimum balance (i.e., overdraw an account or write too many checks) ensures that these accounts continue to make financial sense for the institution.
Share Drafts and the Evolution of Credit Unions
Credit unions first originated in 1844 in Rochdale, England, when a group of weavers established the Rochdale Society of Equitable Pioneers. This organization raised the capital to buy goods at discount prices, subsequently passing the savings along to their members. Many consider Friederich W. Raiffeisen to be the founder of the modern credit union. He established the Heddesdorf credit union in Germany in 1846. In 1901 credit unions were introduced in Canada and arrived in the United States in 1908. The St. Mary's Bank Credit Union in Manchester, New Hampshire, was the first credit union in the U.S.
Originally, membership in a credit union was limited to people who shared a "common bond." For example, they had to work in the same industry or for the same company. Members might all live in the same community. Today, however, credit unions have loosened membership restrictions, allowing the general public to join. At times traditional retail banks have felt the pressure of competition from credit unions.
Related terms:
Bank Panic of 1907
The Bank Panic of 1907 was a set of bank runs and bankruptcies that led industry leaders to draft the first version of the Federal Reserve System. read more
Certificate of Deposit (CD)
A certificate of deposit (CD) is a bank product that earns interest on a lump-sum deposit that's untouched for a predetermined period of time. read more
Checking Account
A checking account is a deposit account held at a financial institution that allows deposits and withdrawals. Checking accounts are very liquid and can be accessed using checks, automated teller machines, and electronic debits, among other methods. read more
Credit Union
A credit union is a member-owned financial cooperative that is created and operated by members and shares profits with owners. read more
Deposit
A deposit is both a transfer of funds to another party for safekeeping and the portion of funds used as collateral for the delivery of a good. read more
Dividend
A dividend is the distribution of some of a company's earnings to a class of its shareholders, as determined by the company's board of directors. read more
Fee
A fee is a fixed price charged for a specific service and is paid in lieu of a salary. A fee can also be additional charges on a good or service. read more
Minimum Balance
The minimum balance is the minimum amount that a customer must have in an account to get a service, such as keeping the account open. read more
Mutual Savings Bank (MSB)
A mutual savings bank is a type of thrift institution originally designed to serve low-income individuals. read more
Retail Banking
Retail banking consists of basic financial services, such as checking and savings accounts, sold to the general public via local branches. read more