Chapter 7Chapter 7

BankingBanking

Essential QuestionsEssential Questions

How does a bank benefit you now?How does a bank benefit you now?

How do you think you will use a bank How do you think you will use a bank in the future?in the future?

If banks didn’t exist, how do you If banks didn’t exist, how do you think your life would be different?think your life would be different?

The Role Banks Play The Role Banks Play

Banks are Banks are profit drivenprofit driven private private businessesbusinesses

They work to earn a profit by They work to earn a profit by selling financial servicesselling financial services

Loans – make profit on interestLoans – make profit on interest Deposits – invest in open marketDeposits – invest in open market Investment servicesInvestment services

How Do Banks Make $$$$?How Do Banks Make $$$$?

Most income that banks earn comes from Most income that banks earn comes from the interest they charge when they lend the interest they charge when they lend moneymoney

Example: Suppose you deposit $100 in your bank Example: Suppose you deposit $100 in your bank account. The bank pays you 2% interest to use account. The bank pays you 2% interest to use your money. The bank lends your $100 to a your money. The bank lends your $100 to a business and charges 6% interest. The banks business and charges 6% interest. The banks income is the 4% difference.income is the 4% difference.

Banks Provide SecurityBanks Provide Security

Purchasing power Purchasing power – interest received from – interest received from savings offset inflation savings offset inflation

Bank Regulation Bank Regulation – Banks are subject to a – Banks are subject to a very high level of government regulationvery high level of government regulation

(must maintain certain level of cash)(must maintain certain level of cash)

Deposits are Insured Deposits are Insured – Federal Deposit – Federal Deposit Insurance Corporation (FDIC) a federal Insurance Corporation (FDIC) a federal government agency that insures deposits government agency that insures deposits up to $250,000)up to $250,000)

Banks Simplify BorrowingBanks Simplify Borrowing

Banks help people pay for their most Banks help people pay for their most important possessions. important possessions.

House / Cars / Education. House / Cars / Education. Businesses borrow for equipment / Businesses borrow for equipment /

expansion & start-up costs.expansion & start-up costs.

HomeworkHomework

Chapter 10 Review Questions (1-17)Chapter 10 Review Questions (1-17)

Types of Banks1. Commercial Banks

Provide many services (FDIC)2. Mutual Savings Banks (State Chartered)

Focus on savings accounts and loans on property (Home Equity Loan)

3. Savings and Loan Associations Primarily set up to lend money for home

mortgages but do offer other services – checking / credit cards / etc.

4. Credit Unions Not-for-Profit for union members – owned by

members Higher interest rates on deposits & lower on loans

5. Internet Banks• Exclusively operated over the internet

Checking Accounts

Checking accounts allow depositors to write checks to make payments

A check is a written order to pay a specific payee

Checking accounts may also be called a demand deposit account (DDA)

Once you write a check and the payee cashes it is “cleared”

Until it is cashed it is considered “outstanding”

Checking Account Types:Checking Account Types:

Interest-Bearing Checking Accounts – Interest-Bearing Checking Accounts – usually large minimums for balance. usually large minimums for balance. You can collect interest on your You can collect interest on your checking account.checking account.

Noninterest-Bearing Checking – most Noninterest-Bearing Checking – most checking accounts that you do not checking accounts that you do not have to keep a large balance.have to keep a large balance.

Why Use A Checking Account?Why Use A Checking Account? SafetySafety – greatest advantage only the person who – greatest advantage only the person who

the check is made out to can cash itthe check is made out to can cash it

Convenience Convenience –large payments – no need to carry –large payments – no need to carry around large sums of cash – access to ATM’saround large sums of cash – access to ATM’s

BudgetingBudgeting – Records of your transaction – checks – Records of your transaction – checks & statements automatically serve as records& statements automatically serve as records

Credit rating Credit rating – the first way to establish credit– the first way to establish credit

Establish banking relationship Establish banking relationship – easier to obtain – easier to obtain loans, and other servicesloans, and other services

Checking Account ResponsibilitiesChecking Account Responsibilities

Maintain sufficient funds – no overdraftsMaintain sufficient funds – no overdrafts

Keep careful / accurate records (register)Keep careful / accurate records (register)

Reconcile your account each monthReconcile your account each month

Never “postdate” or “float” checksNever “postdate” or “float” checks

Purposely writing a bad check is a felonyPurposely writing a bad check is a felony

Famous FelonsFamous Felons

TERMINOLOGYTERMINOLOGY

Account BalanceAccount Balance – the total amount in the – the total amount in the account at a specific dateaccount at a specific date

OverdrawingOverdrawing – writing a check for more – writing a check for more than you have in your account. (NSF Fee)than you have in your account. (NSF Fee)

Third Party CheckThird Party Check – when you receive a – when you receive a check made out to you, you sign it over to check made out to you, you sign it over to someone else someone else

Opening a Checking Account Opening a Checking Account

Very Easy – must be 18 years oldVery Easy – must be 18 years old

2 forms of identification needed2 forms of identification needed

Signature Authorization (signature card)Signature Authorization (signature card)

Sign your check the same way that you Sign your check the same way that you sign signature card sign signature card

Checks can be purchased at bankChecks can be purchased at bank

Check Writing / Parts of a CheckCheck Writing / Parts of a Check

Always use Ink Always use Ink Write LegiblyWrite Legibly Sign exactly as signature cardSign exactly as signature card If you make a mistake – “Void” the check If you make a mistake – “Void” the check

& keep it for your records& keep it for your records Make sure there is $$ in the accountMake sure there is $$ in the account

DepositsDeposits

A Deposit Form must be completed A Deposit Form must be completed

(forms in checkbook or at bank)(forms in checkbook or at bank)

Endorse checks before depositing themEndorse checks before depositing them

Record the deposit promptly in registerRecord the deposit promptly in register

Money may not be available until it “clears Money may not be available until it “clears the bank”the bank”

Endorsing ChecksEndorsing Checks

Signing the back of a check acknowledging you Signing the back of a check acknowledging you have received the moneyhave received the money

Checks must be endorsed to be cashed / deposited Checks must be endorsed to be cashed / deposited or transferredor transferred

Blank Endorsement Blank Endorsement – just signature– just signature Endorsement in Full or Special Endorsement in Full or Special

Endorsement Endorsement – “Pay to the Order of ___”– “Pay to the Order of ___” Restrictive Endorsement Restrictive Endorsement – “For Deposit – “For Deposit

Only”Only”

Check RegisterCheck Register

Booklet provided by your bank for recording all Booklet provided by your bank for recording all checking account transactionschecking account transactions

Record all transactions promptly:Record all transactions promptly: Deposits Deposits InterestInterest Checks (record check numbers)Checks (record check numbers) Debits Debits Withdrawals Withdrawals Bank Fees Bank Fees Keep a Keep a running account balancerunning account balance at all times at all times

Reconciling (Balancing) A Reconciling (Balancing) A Checking AccountChecking Account

Bank Statement – at the end of the Bank Statement – at the end of the month the bank will send a month the bank will send a statement showing all transactions statement showing all transactions for the monthfor the month

Balancing (reconciling) a checking Balancing (reconciling) a checking account – comparing a check register account – comparing a check register with the bank statementwith the bank statement

Statements & CheckbooksStatements & Checkbooks

Statement ColumnStatement Column Balance from Balance from

statementstatement List deposits not on List deposits not on

statementstatement Total statement Total statement

balance and depositsbalance and deposits List checks not on List checks not on

statementstatement Statement balanceStatement balance

Checkbook ColumnCheckbook Column Balance from checkbookBalance from checkbook List deposits not in List deposits not in

checkbookcheckbook Total checkbook balance Total checkbook balance

and depositsand deposits List fees not in List fees not in

checkbookcheckbook Enter interest paymentEnter interest payment Total fees and interestTotal fees and interest Checkbook balanceCheckbook balance

Errors & Cancelled checksErrors & Cancelled checks

Any error should be verified with Any error should be verified with bank & corrected as necessarybank & corrected as necessary

Cancelled checks – The actual check Cancelled checks – The actual check written and deposited may be written and deposited may be returned with statement returned with statement

Most banks keep these now Most banks keep these now (Truncated)(Truncated)

CHECKING ACCOUNT FEESCHECKING ACCOUNT FEES

Monthly maintenance fee – flat fee no Monthly maintenance fee – flat fee no matter how many checks you write.matter how many checks you write.

Service Charge – a special charge for each Service Charge – a special charge for each check you write or other special servicescheck you write or other special services

ATM FeesATM Fees

Electronic BankingElectronic Banking

Electronic Funds TransferElectronic Funds Transfer (EFT) (EFT)When money is moved electronically When money is moved electronically Reduces costs for banks – lower overheadReduces costs for banks – lower overhead

TYPES:TYPES:1.1.ATM TransactionsATM Transactions2.2.Point-of-Sale Transactions (POS)Point-of-Sale Transactions (POS)3.3.Automated ServicesAutomated Services4.4.Telephone BankingTelephone Banking5.5.Online BankingOnline Banking

Electronic BankingElectronic Banking

Automated Teller MachinesAutomated Teller Machines (ATM) (ATM) • make depositsmake deposits• withdraw cashwithdraw cash• transfer money between accountstransfer money between accounts• check your balancecheck your balance• pay some billspay some bills

• Personal Identification NumberPersonal Identification Number (PIN) – Secret (PIN) – Secret number that identifies you to the ATM as the number that identifies you to the ATM as the owner of the cardowner of the card

• Choose a bank with locations you will use to Choose a bank with locations you will use to avoid service feesavoid service fees

Electronic BankingElectronic Banking

Point of Sale TransactionsPoint of Sale TransactionsPaying for something through EFTPaying for something through EFTDebit CardsDebit Cards – cards are used like credit cards but – cards are used like credit cards but money spent is automatically deducted from money spent is automatically deducted from checking account checking account (check cards / deposit access cards)(check cards / deposit access cards)

Online Online Requires to enter PIN into a keypad - $$ deducted Requires to enter PIN into a keypad - $$ deducted automatically from your accountautomatically from your account

OfflineOfflineDebit Card but a receipt is signed - $$ taken out Debit Card but a receipt is signed - $$ taken out later (1-3 days)later (1-3 days)

Electronic BankingElectronic Banking

Automated Services:Automated Services:Direct DepositDirect Deposit

• Paychecks deposited directly into the checking accountPaychecks deposited directly into the checking accountTransfers between accounts Transfers between accounts (savings/checking)(savings/checking)Automatic Loan PaymentAutomatic Loan Payment

• Bank removes money from the account at a specified Bank removes money from the account at a specified time and sends it to a company to pay bill time and sends it to a company to pay bill

(Example: mortgage or insurance payments)(Example: mortgage or insurance payments)Automatic Payments to “third party”Automatic Payments to “third party”

• Utility companies like this techniqueUtility companies like this technique

Electronic BankingElectronic Banking

Telephone BankingTelephone BankingAccess to accounts electronically over telephoneAccess to accounts electronically over telephoneKeypad – PIN – etc.Keypad – PIN – etc.

Online BankingOnline BankingInternet Banking – manage account onlineInternet Banking – manage account onlineComplete various transactionsComplete various transactionsAccess to many different accountsAccess to many different accountsUsername & Password requiredUsername & Password requiredSimplifies banking – Improves security(?)Simplifies banking – Improves security(?)

Consumer ProtectionConsumer Protection

Banks are subject to a high level of Banks are subject to a high level of regulation to protect consumersregulation to protect consumers

Lost & stolen ATM & Debit CardsLost & stolen ATM & Debit Cards• $50 if reported within 2 days$50 if reported within 2 days• $500 if longer period occurs$500 if longer period occurs

Electronic Fund Transfer ActElectronic Fund Transfer Act – (EFTA) – (EFTA) requires banks to inform the customers of requires banks to inform the customers of

fees and supply receipts for electronic fees and supply receipts for electronic transactionstransactions

Guaranteed Payment ChecksGuaranteed Payment Checks

Certified ChecksCertified Checks – Personal check stamped – Personal check stamped and signed by a bank officer - stamp and signed by a bank officer - stamp guarantees that account has the funds to guarantees that account has the funds to cover the checkcover the check

Cashier’s CheckCashier’s Check – Bank’s own personal – Bank’s own personal check signed by bank cashier - $25 feecheck signed by bank cashier - $25 fee

Money OrderMoney Order – Check that draws on the – Check that draws on the money of the bank or other financial money of the bank or other financial company that issue it - Buy one from a company that issue it - Buy one from a bank , post office, currency exchangebank , post office, currency exchange

Traveler’s CheckTraveler’s Check

Check that you pay for in advance, Check that you pay for in advance, and if they are stolen or lost, the and if they are stolen or lost, the company you bought them from company you bought them from replaces them replaces them

Purchase at banks, travel agency, etcPurchase at banks, travel agency, etc

There is usually a small fee.There is usually a small fee.

Safe Deposit BoxesSafe Deposit Boxes

Boxes with individual locks that you Boxes with individual locks that you may rent from a bankmay rent from a bank

Located in the vaultLocated in the vault Cost of a small box is usually $30 – Cost of a small box is usually $30 –

40 a year40 a year Important papers - birth certificatesImportant papers - birth certificates Small valuable items - JewelrySmall valuable items - Jewelry

Wire TransfersWire Transfers

Electronic communication moving Electronic communication moving money from one account to anothermoney from one account to another

Usually $20-$40 fee through banksUsually $20-$40 fee through banks

Other financial organizations may Other financial organizations may also provide this servicealso provide this service

HomeworkHomework