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C HAPTER 4 Banking Services: Savings and Payment Services Overdraft fees now average $34 per transaction. That’s $17.5 billion annually in the United States. -- Center for Responsible Lending Types of Financial Institutions Deposit type financial institutions

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CHAPTER4

Banking Services:Savings and Payment Services

Overdraft fees now average $34 per transaction. That’s $17.5 billion annually in the United States.

-- Center for Responsible Lending


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Types of Financial Institutions

  • Deposit type financial institutions

    • Commercial banks are corporations that offer a full range of services including checking, savings, and lending

      • Insured by FDIC

    • Credit unions are user-owned and nonprofit

      • Hence their fees are usually lower than banks and the rates they pay are usually higher than banks

      • Insured by NCUSIF

Discussion: Are there any significant differences between banks and credit unions? Is your money safe?


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Types of Financial Institutions

(continued)

  • Non-deposit type financial institutions

    • Investment companies offer money market mutual funds. You can write checks on your account

      • More about money markets when we get to investments

    • Post office, convenience stores offer money orders

    • Check-cashing outlets charge 1% to 3% or more to cash a check

    • Pawnshops make loans on possessions (60%?!)

    • Loan-Until-Payday companies (244%?!)

Where do you see the most check-cashing outlets, pawnshops, loan-until-payday companies, etc.?


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Which type of financial institution do you use?

  • Commercial bank

  • Credit union

  • Other (check cashing, post office, etc.)

  • I do not have any money so I do not need one!

Discussion: Why and how do people choose one financial institution over another?


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On-line banking

  • Banking through the telephone, personal computer, and other on-line services

  • Access 24 hours a day, 7 days a week

    • ATM is your teller if you need cash or want to deposit money

  • Privacy and security are concerns

    • Do you allow your browser to store your password?

Why are financial institutions pushing these services?

Some banks (example: HSBC) are attracting Internet-only customers with very high yields on their savings accounts. What is their motivation to do this?


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Types of Financial Accounts

  • Savings accounts

    • Savings accounts (a.k.a. passbook saving accounts)

    • Share accounts (credit union, a.k.a. savings accounts)

    • Certificates of Deposit (CDs)– Shop around!

  • Payment accounts

    • Checking accounts

    • Share draft accounts (credit union, a.k.a. checking)

    • NOW accounts (Negotiable Order of Withdrawal)

      • Checking account that earns interest (negligible)

    • Overdraft Protection?

      • For check? Yes, get it

      • For debit cards? No way!

        • Careful – compare costs. How much is it?


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Types of Financial Accounts

(continued)

  • Money market

    • Money market account (bank or credit union)

      • Insured!

    • Money market mutual fund (mutual fund company)

      • Not Insured! (but still very, very safe)

  • Trust accounts – FBO (usually for minors or the aged)

  • Asset Management Accounts – Brokerages (very high class!)

  • Club accounts

    • “Christmas Club”

    • “Vacation Club”

  • Tanda? – Cundina? – Paluwagan?


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Selecting Payment Methods

  • In 2003, the number of electronic payments exceeded the number of paper check payments for the first time

    • And the trend is accelerating

    • Many Millenials don’t even have (or want) a checkbook

  • Types of checking accounts

    • Regular

      • Usually have a monthly service charge

    • Activity account

      • Charge a fee for each check written

    • Some have both types of fees!

    • No-fee checking accounts


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Other Payment Methods

  • Certified check

    • Personal check with guaranteed payment

  • Cashier’s check

    • Check of a financial institution you get by paying the face amount plus a fee

  • Money order

    • Purchase at financial institution, post office, store

  • Traveler’s check

    • Each check must be signed twice

    • Electronic traveler’s checks – prepaid travel card with ability to get local currency at an ATM


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Other Payment Methods

(continued)

  • Electronic cash

    • ATM Point-of-sale transactions

    • Stored-value cards

      • For long distance, tolls, library fees

    • Smart cards

    • Gift cards

    • Internet payments – PayPal, Yahoo!, etc.

  • Credit cards


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Automated Teller Machines

  • A computer terminal that allows customers to conduct banking transactions

    • Debit card or cash card activates transactions

    • Linked to a bank account – Requires a PIN

    • Liability if debit card is lost or stolen

  • To reduce ATM fees you can...

    • Compare ATM fees before opening an account

    • Use your own bank’s ATM when possible

    • Withdraw larger cash amounts as needed

    • Use personal checks, traveler’s checks, credit cards, and pre-paid cash cards when traveling


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Evaluating Savings Plans

  • Rate of return or yield

    • Percentage increase in value due to interest

  • Compounding - interest on interest

    • Annually, semiannually, quarterly, daily

  • Annual Percentage Yield (APY)

  • After-Tax Rate of Return

    • (1 – Marginal-Tax-Rate) x Rate-of-Return

    • (1 – 25%) x 6% = 0.75 x .06 = 0.045 = 4.5%

    • So even if you are earning 6%, after you pay the taxes on the interest you earned, you are actually earning only 4.5%


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What is “Truth in Savings?”

  • Requires disclosure of...

    • Fees on deposit accounts

    • The interest rate (a.k.a. the nominal rate)

    • The Annual Percentage Yield (APY)

  • Establishes rules for advertising accounts

  • Sets formulas for computing the APY

  • Interest must be compounded on the full principal amount in the account each day

    • The bank can put a hold on your money but it still must pay you any interest you deserve


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Check Reconciliation

  • More than half Americans do not reconcile their checkbook balances

  • Check Register

    • Keep it current!

    • Write every transaction down – Immediately!

  • Bank Statement

  • Check reconciliation forms

  • Check register spreadsheet

  • Quicken, etc.


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Okay, ‘fess up!

Do you reconcile your checking account balance?

  • I balance it to the penny

  • I have a pretty good idea of the accuracy

  • Nope – I never reconcile it

  • As long as there are more checks in my checkbook, what do I have to worry about?


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Check Reconciliation

(continued)

  • When you get the monthly bank statement…

    • Record cleared checks

    • Identify outstanding checks

    • Record deposits confirmed

    • Identify deposits in transit

    • Look for transactions that were left out of the check register

    • Reconcile!

Let’s try an example…


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