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Chapter 13: BankingThe Need for Financial Institutions

The main deposit-taking institutions in Canada are chartered banks, trust companies, caisses populaires, and credit unions.

All invest and lend their customers’ savings and charge fees for services.

Canadian Banking

Banks sell services to earn profits. Most bank revenue occurs when interest is charged on loaned money.

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The Need for Financial InstitutionsThe Bank Act•Canadian Constitution 1867 created a common, unified banking system controlled by the federal government. •All banks in Canada operate under the same rules.

•1871, federal government passed the Bank Act•outlined the rules and regulations that banks must follow. •government provides banks with a charter or licence that gives them the authority to operate. •known as chartered banks.

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The Bank Act (cont’d)

• The Bank Act established three classes of banks– Schedule I (CIBC, TD, President’s

Choice)

– Schedule II (Amex Bank of Canada)

– Schedule III (Citibank)

• To encourage more competition. The bank’s ownership determines its class.

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The Need for Financial InstitutionsBranch Banking•is a system in which there is a head office and interconnected branches or outlets providing financial services to different parts of the country.

The Bank of Canada•helps to keep the Canadian economy as stable as possible in part by regulating the money supply.•Borrowing rate by chartered banks is indicated by the bank rate or prime lending rate that the Bank of Canada sets several times a year.

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Other Financial Institutions

Trust Companies•Established late 1800s•traditionally managed and invested consumers’ money•Today they also provide other banking services, such as loans and savings and chequing accounts. Like chartered banks, the Canada Deposit Insurance Corporation (CDIC) protects consumers’ accounts.

Caisses Popularies and Credit Unions•Similar to co-operatives, caisses populaires and credit unions are organized and owned by people who pool and share their resources.•Services are only provided to members and their families who own at least one share in these institutions.

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Other Financial Institutions

Insurance Companies•are financial institutions that insure risks.•two general areas that are covered include life and health insurance and property and car insurance.

How Insurance Works•Insurance works by sharing risk. Payments are used from many policyholders to pay out the claims of a few.•pool together premiums paid by policyholders. An insurance company’s pool of premiums can severally drain when major disasters happen.

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About Accounts

People open accounts at financial institutions to save money and, potentially, to make money or interest.

Opening and Accessing an AccountPersonal information, such as a birth certificate, a driver’s licence, or a home address, is required to open an account at a financial institution.

Customers must fill out a signature card with their signature to conduct transactions. They will then receive a special card often referred to as a debit card to conduct transactions at the bank or at an automated banking machine.

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About Accounts

Account Statements and PassbooksFinancial institutions give clients an account statement or a passbook that serves as a record of account transactions. Each account has a unique number that appears on these documents.

Making a DepositDeposits can be made at the financial institution or at an automated banking machine (ABM). Personal identification numbers (PIN) are confidential electronic signatures that are necessary to access accounts at ABMs.

Making a WithdrawalWithdrawals for cash can be made in the financial institution or at an ABM.

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Transaction AccountsCompetition in the financial industry has lead to a greater variety of services and transaction accounts offered to customers.

Reasons for Transaction Accounts•allow people to pay for goods and services with cash, cheques, or debit. •Account details, such as writing cheques, making deposits or withdrawals, paying bills electronically, should be recorded in a transaction register.

Straight Transaction Accounts•usually do not pay interest and are used to pay personal and household bills.

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Transaction AccountsTransaction-Savings (Combination) Accounts•provide ways to save money and to pay expenses.•Financial institutions levy service charges on combination and transaction accounts.

Current Accounts•for businesses that are registered with the provincial or federal government. •must be recorded in the business’ name.

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Reconciling the StatementReconciliation occurs when the transaction register and the monthly bank statement are compared and matched to ensure they agree. Monthly reconciliation is important so that the necessary funds are available to cover current and future transactions.

Steps in a Reconciliation

Step 1. Check off transactions that appear on the account statement and the transaction register.

Step 2. List any outstanding cheques and withdrawals.

Step 3. List any deposits in the transaction register and not on the account statement.

Step 4. Subtract Step 2 from Step 3.

Step 5. Enter into the transaction register any transactions on the statement not already entered. Balances of Steps 4 and 5 must match.

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Writing Cheques

Most cheques are written from a chequebook. However, cheques can be written on anything including blank paper, roofing tiles, or envelopes to name a few. Banks will accept these special “cheques,” but will charge a special fee to process them.

Cheque EssentialsBasic information that must be on a cheque are date, payee, drawee, drawer, amount, and account number.

Security FeaturesCheques like currency can be forged. To prevent this, some security features have been added to cheques, such as special inks that change colour when rubbed, watermarks, and special fibres.

Stopping PaymentsA stop payment request can be made if you do not want a cheque to be cashed, or if it is lost or stolen.

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Writing Cheques

Cheque ClearingCheque clearing is the processing of cheques and the settling of account balances among financial institutions. Cashing a cheque involves about 20 different processes that occur at regional data centres, financial institutions, and their branches.

Magnetic Ink Character RecognitionMagnetic Ink Character Recognition (MICR) is special coded characters printed across the bottom of cheques that are read by electronic cheque sorting machines.

Holds on ChequesDeposited cheques can have a hold or delay placed on them. This gives the institution time to clear the cheque and make sure that it does not present a risk to the institution it was written on.

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Shared ABM Networks

Financial institutions introduced ABMs in Canada in 1970. ABMs allow customers to access their accounts quickly, conveniently, and accurately. The electronic funds transfer system (EFTS) is a computerized system that facilitates deposits and withdrawals. It also provides customers with a faster and less costly service.

Debit Cards and Direct PaymentIn 1993, Canadians began to use their ABM cards as debit cards to make Interac Direct Payment (IDP). This service allowed customers to pay for goods and services at businesses.

Telephone BankingTelephone banking allows customers the flexibilty to bank at any time and anywhere using a telephone. Customers usually call a toll-free number and use their bank card and PIN code to access a variety of services through computerized voice instructions.

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Online Banking

Financial institutions also offer customers online banking using computers. With the Internet, customers can now access banking services 24 hours a day, seven days a week (24/7).

Online Banks

Online banks, also known as virtual banks, do not have physical branches. Customers access and communicate with the institution online, on the telephone, by ABM, or through independent professionals.

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Other Financial Services

Financial institutions offer different services that vary in cost to meet the needs of individuals and businesses.

LoansLoans are one of the most important services offered to consumers, businesses, and all three levels of government. Loans generate the major source of income for institutions.

Lines of CreditA line of credit is a form of borrowing that allows a consumer to gain access to instant credit at a prearranged amount from an institution.

Credit CardsA convenient alternative to cash and cheques, credit cards allow consumers to buy goods and services worldwide and even obtain cash from ABMs.

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Other Financial ServicesDirect Deposits•the transfer of funds from sources such as an employer directly into a specified account.

Money Orders and Drafts•a form of payment like a cheque in which the issuing institution guarantees payment to the payee. •Similar to a money order, a draft is issued only by a financial institution for a large amount of money. •It is a safe and secure method to receive payment, and guarantees the payee instant access to his or her money.

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Other Financial Services

Night Depositories

A night depository chute allows customers to make deposits or drop off documents 24/7 that are then processed during branch hours.

Overdraft Protection

For a fee, depositors can have overdraft protection when a cheque is written for more than the funds in the account.

Preauthorized Bill Payments

Preauthorized debit allows individuals to pay businesses using regular, automatic withdrawals from their account.

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Other Financial Services

Safety Deposit BoxesCustomers can rent fireproof, metal boxes to store documents and valuables at a financial institution.

Combination Service PackagesFinancial institutions offer a range of service packages to clients for a flat monthly fee.

Shopping for a Financial InstitutionWhen selecting a financial institution(s), consider and research the services, location, fees, reputation, and so on that are offered.

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Transaction AccountsCompetition in the financial industry has lead to a greater variety of services and transaction accounts offered to customers.

Reasons for Transaction Accounts•allow people to pay for goods and services with cash, cheques, or debit. •Account details, such as writing cheques, making deposits or withdrawals, paying bills electronically, should be recorded in a transaction register.

Straight Transaction Accounts•usually do not pay interest and are used to pay personal and household bills.

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Transaction AccountsTransaction-Savings (Combination) Accounts•provide ways to save money and to pay expenses.•Financial institutions levy service charges on combination and transaction accounts.

Current Accounts•for businesses that are registered with the provincial or federal government. •must be recorded in the business’ name.

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Reconciling the StatementReconciliation occurs when the transaction register and the monthly bank statement are compared and matched to ensure they agree. Monthly reconciliation is important so that the necessary funds are available to cover current and future transactions.

Steps in a Reconciliation

Step 1. Check off transactions that appear on the account statement and the transaction register.

Step 2. List any outstanding cheques and withdrawals.

Step 3. List any deposits in the transaction register and not on the account statement.

Step 4. Subtract Step 2 from Step 3.

Step 5. Enter into the transaction register any transactions on the statement not already entered. Balances of Steps 4 and 5 must match.

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Writing Cheques

Most cheques are written from a chequebook. However, cheques can be written on anything including blank paper, roofing tiles, or envelopes to name a few. Banks will accept these special “cheques,” but will charge a special fee to process them.

Cheque EssentialsBasic information that must be on a cheque are date, payee, drawee, drawer, amount, and account number.

Security FeaturesCheques like currency can be forged. To prevent this, some security features have been added to cheques, such as special inks that change colour when rubbed, watermarks, and special fibres.

Stopping PaymentsA stop payment request can be made if you do not want a cheque to be cashed, or if it is lost or stolen.

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Writing Cheques

Cheque ClearingCheque clearing is the processing of cheques and the settling of account balances among financial institutions. Cashing a cheque involves about 20 different processes that occur at regional data centres, financial institutions, and their branches.

Magnetic Ink Character RecognitionMagnetic Ink Character Recognition (MICR) is special coded characters printed across the bottom of cheques that are read by electronic cheque sorting machines.

Holds on ChequesDeposited cheques can have a hold or delay placed on them. This gives the institution time to clear the cheque and make sure that it does not present a risk to the institution it was written on.

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Shared ABM Networks

Financial institutions introduced ABMs in Canada in 1970. ABMs allow customers to access their accounts quickly, conveniently, and accurately. The electronic funds transfer system (EFTS) is a computerized system that facilitates deposits and withdrawals. It also provides customers with a faster and less costly service.

Debit Cards and Direct PaymentIn 1993, Canadians began to use their ABM cards as debit cards to make Interac Direct Payment (IDP). This service allowed customers to pay for goods and services at businesses.

Telephone BankingTelephone banking allows customers the flexibilty to bank at any time and anywhere using a telephone. Customers usually call a toll-free number and use their bank card and PIN code to access a variety of services through computerized voice instructions.

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Online Banking

Financial institutions also offer customers online banking using computers. With the Internet, customers can now access banking services 24 hours a day, seven days a week (24/7).

Online Banks

Online banks, also known as virtual banks, do not have physical branches. Customers access and communicate with the institution online, on the telephone, by ABM, or through independent professionals.

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Other Financial Services

Financial institutions offer different services that vary in cost to meet the needs of individuals and businesses.

LoansLoans are one of the most important services offered to consumers, businesses, and all three levels of government. Loans generate the major source of income for institutions.

Lines of CreditA line of credit is a form of borrowing that allows a consumer to gain access to instant credit at a prearranged amount from an institution.

Credit CardsA convenient alternative to cash and cheques, credit cards allow consumers to buy goods and services worldwide and even obtain cash from ABMs.

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Other Financial ServicesDirect Deposits•the transfer of funds from sources such as an employer directly into a specified account.

Money Orders and Drafts•a form of payment like a cheque in which the issuing institution guarantees payment to the payee. •Similar to a money order, a draft is issued only by a financial institution for a large amount of money. •It is a safe and secure method to receive payment, and guarantees the payee instant access to his or her money.

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Other Financial Services

Night Depositories

A night depository chute allows customers to make deposits or drop off documents 24/7 that are then processed during branch hours.

Overdraft Protection

For a fee, depositors can have overdraft protection when a cheque is written for more than the funds in the account.

Preauthorized Bill Payments

Preauthorized debit allows individuals to pay businesses using regular, automatic withdrawals from their account.

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Other Financial Services

Safety Deposit BoxesCustomers can rent fireproof, metal boxes to store documents and valuables at a financial institution.

Combination Service PackagesFinancial institutions offer a range of service packages to clients for a flat monthly fee.

Shopping for a Financial InstitutionWhen selecting a financial institution(s), consider and research the services, location, fees, reputation, and so on that are offered.