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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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banking services savings and payment services

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

types of financial institutions
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?

types of financial institutions3
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.?

which type of financial institution do you use
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?

on line banking
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?

types of financial accounts
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?
types of financial accounts7
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?
selecting payment methods
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
other payment methods
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
other payment methods10
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
automated teller machines
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
evaluating savings plans
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%
what is truth in savings
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
check reconciliation
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.
okay fess up
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?
check reconciliation16
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…