Intro to Business Unit Eight Financial Institutions & Banking Systems Chapter 25 The Banking System & Financial Services
GOALS • Desribe the major types of deposit-type and non-deposit financial institutions. • Detail the services provided by the financial industry. • Outline the functions of the Federal Reserve System • Explain how banks earn money, help communities, and create economic growth.
The Business of Banking • Bank = business & You = customer • A bank sells services such as checking accounts, savings accounts, and loans. • Banks earn most of their revenues by charging for loans to individuals, businesses, and governments, and investments.
The Business of Banking • People who wish to start a bank must meet requirements set by federal & state governments. • They must: • Be responsible citizens with high moral character • Have enough capital • Apply for a charter from their state or from the federal government. • Charter from state – operate as state bank • Charter from federal government – operate as a national bank
The Business of Banking • Bank’s operations are regulated more strictly than other businesses. • Government regulation is necessary to assure the safety of customers’ money. • State banks – operate under state banking laws • National banks – operate under federal and state laws.
Banks & Other Deposit-Type Institutions • Deposit-type institutions = depository institutions • They accept deposits for people and businesses to use in the future. • Main types of deposit-type institutions: • Commercial banks • Saving and loan associations • Mutual savings banks • Credit unions
Commercial Banks • Most common • Often called full-service banks because they offer a wide range of financial services. • They offer: • Checking accounts • Savings accounts • Loans to individuals & businesses • Other services
Federal Deposit Insurance Corporations (FDIC) • Federal agency that helps to regulate banks and other financial institutions • Protects depositors’ money in case of the failure of a bank or financial institution that is regulated by FDIC. • Insures all accounts with an amount up to $100,000. • Although FDIC is a government agency, money for its operation is provided by banks. • 99% of banks are FDIC members.
Savings & Loan Associations (S&L) • Specialized in savings accounts and making loans for home mortgages. • In recent years, many S&Ls have changed to savings banks and now include the words savings bank in their titles. • e.g. Lifetime Savings and Loan Association has become Lifetime Savings Bank.
Mutual Savings Bank • Is organized mainly for savings accounts and to make loans to home buyers. • Owned by depositors :- profits go to depositors.
Credit Unions • A credit union is: • User-owned • Not-for-profit • Cooperative • Formed by people in the same: • company, • Government agency, • Labor union, • Profession, • Church, or • Community
Credit Unions • Regulated by National Credit Union Administration (NCUA) – federal agency similar to FDIC. • NCUA also insures depositor’s funds up to $100,000.
Non-Deposit Financial Institutions • Life Insurance Companies • Investment Companies • Consumer Finance Companies • Mortgage Companies • Check-Cashing Outlets • Pawnshops
Types of Financial Services • Accepting Deposits • Transferring Funds (EFT – Electronic Funds Transfer) • Lending Money • Storing Valuables • Providing Financial Advice and Investment Services • Managing Trusts
The Federal Reserve System (Fed) • Set up by federal government • All national banks are required to join Fed, and state banks may join. • Banks that join are known as “member banks”.
Federal Reserve Activities • The government requires banks to keep a certain amount of customers’ money on deposit with the Federal Reserve System in case additional funds are needed to meet the daily needs of their customers. • E.g. if a customer deposits $1,000 and the bank is required by the Federal Reserve System to hold 15% of all deposits in reserve, the bank can lend 85% of the deposit ($850).
Intro to Business Unit Eight Financial Institutions & Banking Systems Chapter 26 Opening A Checking Account
GOALS • Explain the difference between the two major types of checking accounts • Detail the process of opening a checking account. • Define three types of endorsements and explain when each is used.
Advantages of a Checking Account • Convenience • Write checks at home & pay bills online • Safety • Money at home is at risk from fire, theft, carelessness, temptation to spend • Money in the bank is protected by FDIC • Proof of Payment • A check is legal proof of payment • Record of Finances • Every deposit you make / every check you write is recorded. • Where money is going / how much you have
Types of Checking Accounts • Checking accounts differ: • from one bank to another • from one part of the country to another • in features they offer customers • in costs • Comparison shopping for a checking account is necessary. Service Charge: A fee a bank charges for handling a checking account
Types of Checking Accounts • Regular Checking Account • Interest Checking Account • Special Checking Account
Regular Checking Account • If you write a large number of checks • Service charge is usually waived for minimum / average monthly balances • Minimum monthly balance is usually $300 or higher • Average monthly balance is the sum of the daily balance divided by the number of days in the month • Some banks waive service charge if the depositor keeps a certain balance (e.g. $1000), in a savings account at the same bank.
Interest Checking Account • Require a minimum monthly balance or an average monthly balance of $500 or more • If the account falls below the required amount, the bank usually pays no interest AND will usually add a service charge to the account • Interest rate that banks pay their customers also vary.
Interest Checking Account • A bank will offer a higher interest rate when a higher balance is maintained. • Interest rate may be tied to the current cost of money in the marketplace known as money market rate. Money market rate is the interest rate that big users of money, such as governments and large corporations, pay when they borrow money
Special Checking Account • Basic charge is about 10 to 20 cents for each check written. • May be a small monthly service charge for the account. • Credit unions may provide checking accounts for members.
Sharedrafts • Members of credit unions are called shareholders when they have money on deposit, and their checks are called sharedrafts.
Opening a Checking Account • Take a paycheck or cash to the new accounts desk in a financial institution. • The representative will help you: • Sign a signature card • Make your deposit • Select your checks • Some banks require you to be 18 years or older to open a checking account.
The Signature Card • A bank will deduct money from a checking account to cover checks only when authorized to do so by the depositor. • Signature card is the bank’s official record of your signature. • You must use the same signature on each check write
Joint Account • When two or more people have an account together. • Each person who will write checks on the account must sign the signature card.
Making the First Deposit • When you deposit money in a checking account, you fill our a deposit slip deposit ticket. • Deposit slip is a form on which you list all items you are depositing – currency, coins, checks • Deposit slip shows: • Your name • Your account number • The date • The items deposited • Total amount of the deposit
Endorsing Checks • An endorsement is written evidence that you received payment or that you transferred your right of receiving payment to someone else.
Purpose of Endorsing Checks • When you endorse a check, your responsibilities are almost as great as if you had written the check yourself. 3 Main Purposes of Endorsements: • Endorsements allow the recipient of the check to cash, deposit, or transfer it to someone else. • Endorsements serve as legal evidence that the receiver cashed or transferred the check to someone else • Endorsements mean that the endorser will pay the check in case the next owner of the check cannot collect the money.
Types of Endorsements 3 Main Types of Endorsements: • Blank Endorsement • Consists of only the endorser’s name/signature • Endorsement should match signature on signature card • Check is payable to anyone with the check
Types of Endorsements 2. Special Endorsement • Includes the name of the person to whom the check has been transferred • Also called Full Endorsements • Include “Pay to the Order of …” before the signature.
Type of Endorsement • Restrictive Endorsement • Limits the use of the check to the purpose given in the endorsement (e.g. For deposit only) • If you write “For deposit only” above signature and account number, this endorsement restricts use of the check so it can only be deposited to your account. • If a check with a restrictive endorsement is lost, it cannot be cashed by the finder.
Recording a Deposit • Besides the checks, a checkbook also contains forms on which a depositor writes a record of deposits made and checks written. • Depending on the checkbooks, records are kept on the check stub or check register. • When you make a deposit to your checking account, you should immediately enter the amount on the check stub or in the check register.
Intro to Business Unit Eight Financial Institutions & Banking Systems Chapter 27 Using Checks & Other Payment Methods
GOALS • Demonstrate proper check-writing procedures • Explain the purpose of a stop-payment order • Name three special types of checks • Describe how payments are made through electronic funds transfer
Elements of a Check • Drawer owner of the account and the person who signs the check. • Payee the person to whom the check is written. • Drawee the bank of other financial institution that pays the check.
Filling out the Check Stub/Register • Two types of forms are available • Check stub • Check register • Check Stub • Form attached to the check by a perforated line • Check Register • Separate book, usually the same size as the checkbook Always fill out the stub or register first
Writing a Check • Write checks in order by number • Write the date in the proper space on the check • Write the payee’s name on the line following Pay to the Order of. • Write the amount of the check in gisures after the printed dollar sign • Write the amount of dollars in words on the line below the payee’s name. • Write the purpose of the payment on the line at the bottom of the check • Sign your check
Forgery • Writing another person’s signature on a check without his or her authority is a crime called forgery. • A check with such a signature is a forged check.
Tips for Good Check Writing • Write checks only on the forms provided by your bank. • Write checks in ink • Only write checks if you have money in your account to cover them. • Use the current date • Avoid making checks payable to Cash / Bearer. • Always fill in the amount • Void checks on which you make errors. • Record every payment from your checking account, whether the payment is by check or EFT.
Stopping Payment on a Check • Stop-payment order is a written notice from the drawer telling the bank not to pay a certain check. • Stop-payment order request the following information: • Date • Check number • Amount • Payee • Drawer’s signature • Banks charge a substantial fee for stopping a payment, so use this option wisely
Accepting & Cashing Checks • According to law, a check is payable on demand, at the time the holder of the check presents it for payment at the bank on which it is drawn. • However, a bank may refuse, if the check was dated a while ago. • Some checks carry a printed notation, Please cash within 60 days
Accepting & Cashing Checks • Be cautious from whom you accept checks because a check is valuable only when it is drawn on a bank in which the drawer has money on deposit. • Do not expect strangers to cash checks for you.
Certified Checks • a personal check for which a bank has guaranteed payment. • Certification is stamped on the face of the check and is signed or initialed by a bank officer. • Amount of the check is immediately subtracted from the account • if check is not used, it may be returned to the bank and credited to account
Cashier’s Checks • A check that a bank draws on its own in-house funds. • A bank usually keeps funds in an account of its own on which it writes its own checks. • Cashier’s check costs = amount of the check + service fee • More acceptable than personal checks