Most banks offer both money market accounts and savings accounts for depositors, although money market accounts are less universal. At first glance, these two accounts are remarkably similar – both are interest-paying, both have some liquidity limits and both are protected by the Federal Deposit Insurance Corporation (FDIC). However, most money market accounts tend to pay a slightly higher interest rate, which can make them more attractive for savers.
Financial institutions are very limited in what they can do with funds that are placed into a savings account, but they do have a little more flexibility when it comes to money market accounts. For example, they are allowed to invest money market account money into certificates of deposit (CDs) or government bonds (or other safe investments). This leads most institutions to offer higher interest rates on money market accounts to attract money away from savings accounts.
The differences between a money market account and a savings account are generally not very significant. Savers who have a history of withdrawing funds from their savings accounts on a regular basis might want to stay away from money markets, as most have larger restrictions on how often withdrawals can be made. Some may even have a waiting period (up to a week) on receiving money.
In the end, depositors end up choosing a money market account because it offers a higher interest rate than their bank’s savings account. While it might mean the difference between earning 1% rather than 0.5%, that might be enough to offset the liquidity constraints if the depositors are unlikely to need quick access to their cash.
Do not confuse money market deposit accounts with money market funds. Money market funds are not covered by the FDIC and do not act like traditional demand deposit accounts.