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Consumer Banking Certification

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Consumer Banking Certification - Reading Material 2 of 26

Table of Contents

1. Broad Overview of Banking Products and Services -----01 2. Overview of Retail Banking -----05 3. Retail Deposit Products -----11 4. Deposit Insurance Protection -----18 5. Retail Banking Transactions -----20


1. Broad Overview of Banking Products and Services The range of products and services offered by Banks has undergone total metamorphosis in the last few years. Where banks used to offer simple deposit and loan products a few decades earlier, today the same banks offer a wide range of products and services that have grown both in complexity and sophistication. At a broad level, products and services offered by banks can be grouped as under:

Banking Products & Services

ConsumerBanking

WIMCorporateBanking

Accepting Deposits Making Loans

Investment Banking

Payment Services

While the terminologies might be slightly different across banks, at a broad level all the products and services offered by banks can be grouped under one of the above.

Retail Banking or Consumer Banking Products and Services: Consumer banking deals with

providing banking services to individual consumers. With a large customer-base that runs into millions of accounts for large banks it has been a key growth driver for banks across the globe. Consumer banking is all about making available Different kinds of deposit products like Current Accounts, Savings Accounts, Transaction

accounts, Cash Management accounts, Term Deposits (akin to the Indian Fixed Deposit), and Different kinds of loan products like Credit Cards, Auto Loans and Home loans etc.

Making effective use of technology, consumer banking has grown rapidly in the last few years particularly in the developing markets, where it has tapped into the latent demand for consumer finance in a big way.

Corporate Banking Products and Services: The Wholesale Banking arm of a bank typically

deals with commercial establishments (referred to by some banks as the Small and Medium Enterprise (SME) sector); large corporates and business enterprises; and institutions like universities and colleges, charities etc.


If Consumer banking is characterized by large numbers and standardized products, Wholesale banking is characterized by relatively smaller number of accounts but with increased focus on product customization and relationship management.

Products and services offered by banks in this space include:

Equity products Debt products Hybrids Advisory services

Wealth and Investment Management: This division of a bank typically handles relationships

with the rich and famous that in banking parlance is referred to as High Net worth Individuals (HNIs). Premier banking and private banking services of bank aim to manage large asset portfolios of their clients for a fee.

It is a high profile business segment, which is characterized by trust, confidentiality and secrecy, fiduciary capabilities and intense relationship management etc. Generally the stakes are very high for a bank in this segment and the chance for errors or shortfalls in service delivery are minimal. At the same time, it is a high growth, high revenue business for every bank and hence the tremendous focus on this segment by all banks in the last few years.

Typical products and services include:

Financial Planning Investment Planning Insurance Planning Tax Planning Retirement Planning, and Estate Planning

Investment Banking Services: The investment banking division is a critical arm of modern day

banks because of its ability to generate huge revenues for the bank. Changes in the U.S. legal environment have allowed commercial banks to offer investment banking services under a common umbrella today. Typical services include:

• Assist corporations in raising capital – equity and debt • Provide strategic advisory services – M&A • Underwriting and distributing new security issues • Brokerage services to public & institutional investors • Proprietary trading • Financial security research to investors • Market-Making, in particular securities • Forex markets, private banking and asset management

Payment Services: One service offered by the banking system that encompasses all its business

segments is the Payment Services. It essentially refers to the ability of the banking system to move money and to move money across geographies and in the most efficient manner.


2. Overview of Retail Banking

Retail banking is the cluster of products and services that banks provide to consumers and

smallbusinesses through multiple sales and distribution channels. As this definition implies,

banksorganize their retail activities along three complementary dimensions: customers served,

products andservices offered, and the delivery channels linking customers to products and services.

Consumers and small businessesare typically the

core retail banking customers.Consumersare

served almost entirely by the retail banking

business unit, although some

largeorganizationshave a separate subprime

consumer finance unitwith its own brand

identity. At the other end ofthe spectrum,

services used primarily by highnet-worth

individuals and households, such astrust and

brokerage services, are nearly alwaysprovided by

business units that specialize inthese activities.

The small businesses served byretail banking

business units range from smallstart-ups and sole

proprietorships to moreestablished firms.

Retail banking channels today include branches

or stores, the Internet(online banking), field

sales force(direct marketing), telephone

banking(contact centers), Automated Teller

Machines (ATMs) and mobile banking(leveraging

competencies offered by themobile/smart phone)

The typical products and servicesofferedinclude deposit products(current/savings/Term

deposits), loan products (Home loans/credit cards/auto loans) and other services(safe

depositlockers/ remittances).

Deposit taking is the core retail banking activity on the liability side. Deposit taking includes

transaction deposits, such as Savings accounts, Everyday Transaction accounts, and non-transaction

deposits, such as time deposit. Many institutions cite the critical importance of deposits,

especiallyconsumer transaction account deposits, in generating and maintaining a strong retail

franchise. Retaildeposits provide a low-cost, stable source of funds and are an important generator

of fee income. Transaction and saving accounts are also viewed as pivotal because they serve as

the anchor tying customers to thebank and allow cross-selling opportunities

On the asset side of the balance sheet, the key retail banking products are consumer credit and

smallbusiness loans. Consumer credit includes credit cards, Home loans, auto loans,education

loans, and other personal loans.


Key Characteristics of Retail Banking Retail banks perform two crucial functions for customers: firstly, they enable customers tobank

their money securely, access it easily, and conduct transactions; and secondly, theyprovide access

to additional money to fund large purchases, such as buying a home. Retailbanking is characterized

by

The presence of a very large customer-base, which typically runs into millions of customers for large banks.

The average value of the relationships tend to be relatively small and the transaction sizes (ticket sizes) are also small

Simplified products and services - deposit accounts/Loans/TPP Sales. Further, the products and services themselves appear to be very standardized with minimal or no customization to suit the requirements of individual customers

Retail banking is also characterized by a significant focus on process orientation. Right First Time (RFT), Management by Exception (MBE) etc., gain added relevance in theworld of retail banking

Importance of Retail Banking

The banking industry in the U.S.A in the 1990s was characterized by a dramatic change in banks’

attention away from retail banking. Banks focused on broadening products, diversifying revenues,

substituting alternative delivery channels for branches, and offering a multitude of financial

services to all types of retail, corporate, and wholesale customers.

However, the last few years have again seen a change in the focus of the banks vis-à-vis retail

banking. This ‘return-to-retail’ is reflected in a multitude of ways – the attention given by equity

analysts tracking bank performances, strategic shifts announced by some of the countries’ largest

banks and the feverish pace of mergers and acquisitions in the retail banking space. In recent

years, retail banking has become a key area of strategic emphasis in the U.S. banking industry, as

evidenced by rising trends in retail loan and deposit shares on commercial bank balance sheets

and a continuing increase in the number of bank branches.

An analysis of certain key banking parameters in the U.S. like retail lending; retail deposits and

the number of bank branches indicates that the ‘return-to-retail’ being witnessed now is likely to

be a long-term phenomenon.

The retail loan share as a percentage of total loans, and the retail deposit share as a percentage

of total deposits, which had dropped substantially in the mid to late 1990s has been on a growth

phase from the year 2000.


The reasoning behind this renewed interest in retail banking is not difficult to comprehend. In

these volatile times, retail banking offers some critical advantages, which include

Funding sources – retail deposits tend to be cheap, stable and diversified, characteristics that help banks make long-term, affordable loans while mitigating liquidity, interest rate and credit risks. For e.g., Wells Fargo’s average cost of funds are estimated at 1.5% p.a., which is the cheapest in the industry.

Cross-selling opportunities - ability to cross sell products and services to a captive customer base – for e.g., banks like Bank of America and Wells Fargo sell an average of 5 to 6 different products and services to every customer of theirs.

Diversification of risks – the granular nature of the retail lending portfolio—which contains a large number of small, often collateralized loans—means that the lending portfolio may be less volatile over time because of diversification across customers.

Revenue stability – retail banking provides certain natural hedges to stabilize revenues. One example cited by bankers is the low or negative correlation between mortgage originations and deposit margins. Deposit margins—the difference between rates paid on retail deposits and alternative market funding rates such as the federal funds rate (the rate at which one bank lends money to others banks for very short terms in the money market) —are an important source of income in retail banking. In periods of low interest rates, deposit margins tend to be low, reducing the implicit income earned on deposit balances. Low rates, however, spur mortgage refinancing, which boosts fee income. Changes in income flows from the two activities thus tend to offset one another over the interest rate cycle, giving greater stability to overall retail banking revenues.

Increased profitability – a bank with a strong retail focus on both the assets and liabilities side tends to be highly profitable. This is because of the combined effects of low cost of funds, relatively higher yields on assets and low risk of the asset portfolio.

Capital flows and ability to transfer risks – in mature retail banking markets like the U.S., a vibrant secondary market exists for the retail assets originated by banks and FIs. This makes it possible for the originators to have continuous access to capital and also transfer their risks to secondary market investors by securitization of their loan portfolios.


The Retail Banking Customer Life Cycle

Retail banks design their basic products and services keeping the varied requirements of their customers at different stages of their life cycle. In the U.S. as in most other countries, local laws do not permit banks to enter into valid contracts with minor children. Hence, banks generally focus their attention on customers once they attain the legal status of being a ‘major’ i.e., eighteen years of age. Banks classify their customers in four broad categories based on their age and make available specific products and services to meet their unique requirements at each of these stages. For e.g., when children join the Under-Grad programs in Universities and are staying away from home they have certain basic banking needs like a checking account and a low-value credit card, the payment of which is guaranteed by the parents/guardians. Similarly, a customer who is at the prime of his income generation period (30s to 50s) is looking for a variety of loans to satisfy his requirements of owning a home, an automobile, credit cards for self and spouse/children; and unsecured personal loans for taking vacations etc. Accordingly, banks target customers in this stage with a variety of loan products.

A bank looking at customers in

the retirement phase would

focus on them by offering

deposit products that will give

higher yields while protecting

the principal (Certificate of

Deposits) and basic banking

account (Checking).

Key Players in the U.S. Retail Banking Industry

(http://www.ffiec.gov/nicpubweb/Content/HELP/Institution%20Type%20Description.htm)

The U.S. retail banking industry has a multitude of players ranging from small, regionally oriented savings banks to very large, multi-state commercial banks. Below, we give a brief description of some of the different types of banks in the U.S.A.

Commercial Bank – defined as a financial institution that is owned by stockholders, operates for a profit, and engages in various lending activities. These commercial banks are either national chartered (Bank of America, Wells Fargo, JP Morgan, Citigroup etc.) or state chartered. A Commercial Bank whose charter is approved by the Office of the Comptroller of the Currency (OCC) rather than by a State Banking Department is said to be nationally chartered and is also

http://www.ffiec.gov/nicpubweb/Content/HELP/Institution%20Type%20Description.htm


known as a national bank. National Banks are required to be members of the Federal Reserve System and belong to the Federal Deposit Insurance Corporation.

Thrifts - are organizations that primarily accept savings account deposits and invest most of the proceeds in mortgages. Savings Banks and Savings and Loan Associations and Credit Unions are examples of Thrift Institutions.

o Savings Bank – defined as a banking institution organized to encourage thrift by paying interest on savings. Savings banks can have state and federal affiliations, for e.g., State Savings Banks and Federal Savings Banks.

o Savings & Loan Association – defined as a financial institution that accepts deposits primarily from individuals and channels its funds primarily into residential mortgage loans.

Finance company – is a financial intermediary that makes loans to individuals/ businesses Credit Union – is defined as a financial cooperative organization of individuals with a common affiliation. Credit unions can have federal, state, or corporate affiliations. Online Bank – a banking company that does not have a physical branch network but deals with its customers using other alternative sales and delivery channels These different types of banks noted above could function as part of a large banking or finance group with interests in multiple financial services domain or as a stand-alone bank that provides an umbrella of services. Hence, the banks can be organized as Universal Banks or Bank Holding Companies or as Financial Holding companies.

Universal Banks: Universal banks offer the full range of banking services, together with

nonbanking financial services, under one legal entity. In addition, the banks have direct links

between banking and commerce through cross-shareholdings and shared directorships.


Bank Holding Company: A company that owns and/or controls one or more U.S. banks or one that

owns, or has controlling interest in, one or more banks. A bank holding company may also own

another bank holding company, which in turn owns or controls a bank; the company at the top of

the ownership chain is called the top holder. The Board of Governors is responsible for regulating

and supervising bank holding companies, even if the bank owned by the holding company is under

the primary supervision of a different federal agency (OCC or FDIC).

Financial Holding Company: A financial entity engaged in a broad range of banking-related

activities, created by the Gramm-Leach-Bliley Act of 1999. These activities include: insurance

underwriting, securities dealing and underwriting, financial and investment advisory services,

merchant banking, issuing or selling securitized interests in bank-eligible assets, and generally

engaging in any non-banking activity authorized by the Bank Holding Company Act. The Federal

Reserve Board is responsible for supervising the financial condition and activities of financial

holding companies.


3. Retail Deposit Products

A deposit is an account at a banking institution that allows money to be held on behalf of the account holder. Deposits are considered as the lifeline of banks because they constitute the major source of funds for the bank.

A customer opens a deposit account for:

Managing cash safely

Withdrawing cash and maintaining liquidity easily

Transferring cash quickly and conveniently

Earning interest on deposits

Tracking financial transactions easily

Financial institutions in the US, such as banks, savings and loan associations, savings banks and credit unions, offer various options for depositing their money in deposit accounts. Regulation D of the US Federal Reserve classifies deposit accounts into two broad categories, viz., Transaction Accounts and Non-Transaction Accounts. Other classifications include demand deposits vs. time deposits and non-interest bearing vs. interest-bearing accounts.

Transaction accounts: are deposits or accounts from which the depositor or account holder is

permitted to make transfers or withdrawals by negotiable or transferable instruments, payment

orders of withdrawal, telephone transfers, or other similar devices including an automated teller

machine (ATM), or another electronic device, including by debit card. Transaction accounts consist

of the following key types of deposits:

(a) Demand deposits; and (b) NOW accounts;

(a). Demand deposits (commonly referred to as Checking Accounts) are interest bearing deposits

that are payable immediately on demand, or that are issued with an original maturity or required

notice period of less than seven days. Demand deposits include any matured time deposits without

automatic renewal provisions, unless the deposit agreement provides for the funds to be

transferred at maturity to another type of account. A bank like Wells Fargo provides Checking

Accounts in multiple formats to suit the specific needs of its target customer groups.

(b). NOW Accounts are interest-bearing deposits (i) on which the depository institution (bank) has

reserved the right to require at least seven days' written notice prior to withdrawal or transfer of

any funds in the account and (ii) that can be withdrawn or transferred to third parties by issuance

of a negotiable or transferable instrument.


NOW accounts, as authorized by federal law, are limited to accounts held by:

o Individuals or sole proprietorships; o Organizations that are operated primarily for religious, philanthropic,

charitable, educational, or other similar purposes and that are not operated for profit.

o Governmental units including the federal government and its agencies and instrumentalities; state governments; county and municipal governments

NOTE: There are no regulatory requirements with respect to minimum balances to be maintained in a NOW account or to the amount of interest that may be paid on a NOW account. An account is not a transaction account merely by virtue of arrangements that permit the following types of transfers or withdrawals, regardless of the number:

o Transfers for the purpose of repaying loans and associated expenses at the same depository institution (as originator or servicer).

o Transfers of funds from this account to another account of the same depositor at the same depository institution

o Withdrawals for payment directly to the depositor when made by mail, messenger, automated teller machine, in person, or by telephone

Non-Transaction accounts: Non transaction accounts include:

o Savings deposits - money market deposit accounts (MMDAs), and passbook savings deposits

o Time deposits - time certificates of deposit, and time deposits – open account

(a). Savings deposits are deposits with respect to which the depositor is not required by the

deposit contract but may at any time be required by the bank to give written notice of an

intended withdrawal not less than seven days before withdrawal is made, and that is not payable

on a specified date or at the expiration of a specified time after the date of deposit.

The term savings deposit also means a deposit or account, such as an account commonly known as

a passbook savings account, a statement savings account, or a money market deposit account

(MMDA). In the savings deposit account

o the depositor is permitted or authorized to make no more than six transfers and withdrawals, or a combination of such transfers and withdrawals, per calendar month or statement cycle (or similar period) of at least four weeks, to another account

o Transfers from savings deposits for purposes of covering overdrafts (overdraft protection plans) are included under the withdrawal limits specified for savings deposits.

There are no regulatory restrictions on the following types of transfers or withdrawals from a

savings deposit account, regardless of the number:

o Transfers for the purpose of repaying loans and associated expenses at the same depository institution (as originator or servicer)

o Transfers of funds from this account to another account of the same depositor at the same institution when made by mail, messenger, automated teller machine, or in person


o Withdrawals for payment directly to the depositor when made by mail, messenger, automated teller machine, in person, or by telephone (via check mailed to the depositor)

Further, for a savings deposit account, no minimum balance is required by regulation, there is no regulatory limitation on the amount of interest that may be paid, and no minimum maturity is required (although depository institutions must reserve the right to require at least seven days' written notice prior to withdrawal as stipulated above for a savings deposit). Any depository institution may place restrictions and requirements on savings deposits in addition to those stipulated above. In the case of such further restrictions, the account would still be reported as a savings deposit. Other savings deposits are deposits or accounts that meet the above definition of a savings deposit but that permit no transfers by check, draft, debit card, or similar order made by the depositor and payable to third parties. Other savings deposits are commonly known as passbook savings or statement savings accounts.

(b). Time deposits are deposits in which the depositor does not have a right, and is not permitted, to make withdrawals from within six days after the date of deposit unless the deposit is subject to an early withdrawal penalty of at least seven days' simple interest on amounts withdrawn within the first six days after deposit. A time deposit from which partial early withdrawals are permitted must impose additional early withdrawal penalties of at least seven days' simple interest on amounts withdrawn within six days after each partial withdrawal. If such additional early withdrawal penalties are not imposed, the account ceases to be a time deposit. The account may become a savings deposit if it meets the requirements for a savings deposit; otherwise it becomes a demand deposit.

Time deposits take two forms:

(i) Time certificates of deposit (including rollover certificates of deposit) are deposits evidenced by a negotiable or non-negotiable instrument, or a deposit in book entry form evidenced by a receipt or similar acknowledgement issued by the bank, that provides, on its face, that the amount of such deposit is payable to the bearer, to any specified person, or to the order of a specified person, as follows:

o On a certain date not less than seven days after the date of deposit, o At the expiration of a specified period not less than seven days after the date

of the deposit, or o Upon written notice to the bank which is to be given not less than seven days

before the date of withdrawal.

(ii) Time deposits - open account are deposits (other than time certificates of deposit) for which there is in force a written contract with the depositor that neither the whole nor any part of such deposit may be withdrawn prior to:

o The date of maturity which shall be not less than seven days after the date of the deposit, or

o The expiration of a period of written notice of not less than seven days.


Other Products and Services

Annuities: An annuity is an investment made by an individual, either in lump sum or in installments which is paid over a certain period of time. The individual in turn receives a specific amount either for life or for a fixed period of time. In the event of the death of the investor the amount is refunded to the investor’s nominee.

Annuities are also a form of retirement solution for the aged, which is why it is referred to as pension plan. Annuities do not provide any insurance coverage instead they offer a guaranteed income either for life or for a certain period of time.

There are various types of annuities to choose from such as fixed, variable, life annuity, guaranteed period annuity, annuity “certain”, hybrid annuity, deferred annuity, equity indexed annuity.

Mutual Funds: Are form of pooled investments invested in diversified investment instruments such as stocks, bonds, options, commodities, money market securities. The investor can choose to invest in various types of MF depending on their risk appetite.

o Money Market Fund invests in short debt instruments such as T-bills for short time ranging from one day to one year. MMF are liquid investments.

o Bond/Income Fund: Provide higher returns compared to CD’s and MMF but are subject to interest risk this means if interest rate goes up the fund value will come down.

o Balance Fund: Are invested in both fixed income and equities. o Equity Funds: Invest in stocks for long term capital growth,

Insurance: Refers to providing protection to individuals and companies against a specific loss, in exchange for a premium.

Fixed Income Securities: are financial instruments that provide interest earnings and return the principal at maturity. They provide loans to government bodies or business entities for specified period of time. Interest payment on these fixed income securities are made annually, semi-annually or monthly or they may be compounded till the date of maturity. Various types of fixed income securities include:

Treasury securities - debt of the government

Agency securities are guaranteed by various government agencies other than the US treasury.

Corporate bonds are debt securities issued by private and public corporations.

Municipal Bonds also known as Munis issued by US state governments and local government agencies to fund specific projects.

Asset Backed Securities, bonds that represent mortgage, home-equity, credit card and auto loans.

Individual Retirement Arrangement (IRA): is a personal savings plan which allows consumers to set aside money for their retirement. IRA is similar to PPF offered in India. To make contribution to an IRA, consumers must be under the age of seventy and a half years must have a taxable compensation in the form of salaries, commissions, bonus or net income from self-employment. Compensation does not include earnings from property such as rental income, dividend, interest or deferred compensation.


Overdrafts on Checking Accounts

Let us assume a hypothetical situation when Paul Anderson, a customer of Citigroup has issued a check of $500 favoring BGV Fund. When the check is presented at the bank through the clearing channels, Citigroup finds that the account has only 490$ remaining in the account. Citigroup can return the check but a check bounce can have negative implications for the check issuer – his debit history (a debit side equivalent of the credit histories published by a credit agency like CIBIL in India or an Equifax or Experian in the USA) will carry a remark for the next three years about this check bounce.

Citigroup, in order to protect the interests of its depositor/account holder decides to provide an automatic overdraft or what is also commonly referred to as a courtesy overdraft to cover the shortfall, so that the check can be processed and paid. An automatic overdraft is an unsecured short-term loan made by the bank to the customer without the presence of a signed agreement between the two parties. Automatic overdrafts are commonly referred to as an opt-out scheme, meaning if the customer does not want this protection she/he has to request the bank to desist from providing this automatic cover. Why will any customer in his right frame of mind opt-out of such a facility?

The only reason could be the relatively higher charges that banks collect from their checking account holders for providing the automatic OD protection. FDIC research reveals that the median charge levied by banks in the USA works out to about $ 27, (range of $10 to $38) almost the same amount that banks charge for bouncing checks in a non-sufficient funds situation.

There are other better and cheaper ways of getting the same amount of protection but without having to pay the high fees.

One simple way is to get Standard Overdraft Protection by linking the Checking account to a Savings or Credit Card account. When the checking account gets overdrawn, money is automatically transferred from the linked account to cover the shortfall and the bank only levies a nominal service charge (median of 5$) for providing this service

A second way of protection is to enter into a contractual agreement with the bank that can set up a line of credit to lend the customer funds that will cover the overdraft. The main charge for this service is the interest charged on the funds advanced. The typical annual percentage rate charged is 18 percent.

The Federal Reserve is acting on consumer concerns pertaining to the automatic overdraft protection facilities offered by banks. In November 2009, the Federal Reserve announced final rules that prohibit financial institutions from charging consumers fees for paying overdrafts on automated teller machine (ATM) and one-time debit card transactions, unless a consumer consents, or opts in, to the overdraft service for those types of transactions. These new rules are effective from July 1, 2010. However, it should be noted that Checks continue to be outside the purview of new rule because most of the customers use checks to make important payments like rents or utility bills and want the automatic protection to be available to them with or without a formal opt-in to the scheme.


The role of Debit History Bureaus

If you have applied for a mortgage, a credit card or any other personal loan in India (in the recent past) or in the USA, you would have experienced what is commonly referred to as a credit check i.e., an unbiased, third-party verification of your past credit history. But, what if your banker tries to do something similar, when you ask him to open a checking account for you. Sound incredulous because at the end of day it is the customer’s money, which is going to be lying with the bank. Why should the banker be concerned about it then?

Banks generally undertake stringent customer due diligence in respect of all borrower accounts since the bank takes a credit exposure on its borrowers and runs the risk customer default on loans. Measuring and tracking credit ratings (internal and external ratings), credit scores and credit histories have always been religiously followed in respect of loan accounts.

However, in respect of deposit accounts the same rigor was found to be missing because of the lack of credit risk in such relationships. However, banks were exposed to other types of risks including risk of fraudulent transactions in the deposit accounts, which have resulted in banks losing millions of dollars. Hence, there was a need for developing systems, which could give visibility into the past behavior of a customer’s deposit accounts. The debit history tracking systems were developed in this background and are commonly referred to as Check Systems. Banks like to protect themselves and their depositors and want to be assured that the new account that they are opening will be used for legitimate purposes and that the account holder does not have any malafide intentions in opening the account.

How does the banker verify the antecedents of a deposit account holder? Enter the Debit History Bureaus or Check Bureaus as they are commonly referred to.

There are three widely used Check Systems in the U.S., each of which provides information about the performance of a customer’s transaction and non-transaction accounts.

ChexSystems

Commonly referred to as the first of the three major "Check Systems" in the U.S., Chex Systems is an association of financial institutions that network together in order to develop a database that maintains the records of mutually unwanted customers. To make sure that only financially responsible individuals open up checking accounts at member institutions, these banks report on customers who demonstrate poor financial management skills. When a customer’s checking account is closed due to demonstrated mismanagement, then he or she is reported to Chex Systems. Once done, the customer will have a very difficult time opening up an account at any other financial institution partnered with Chex Systems for the next five years.

Since the vast majority of financial institutions (banks) reject potential customers who are on file at Chex Systems, being reported to them can put an individual at an extreme disadvantage. But what, exactly, does it take to get a checking account closed and reported to Chex Systems in the first place? The answer the bank usually gives out is simply “closed for cause.” Yet there are many ways that a customer can end up having his or her account terminated. These range from acts as serious as fraud to the simple irresponsibility that leads to excessive overdrafts. It is important to remember, however, that policy can vary greatly between financial institutions. Depending upon which bank is in question, instances in which accounts are “closed for cause” can involve customers:

o not reimbursing their bank for overdraft amounts


o misusing savings accounts, ATMs or debit cards o offering information that is misleading at the time the account is

opened

Yet while there are many factors that can lead to account closure, banks are not always forthcoming about the specific reason for terminating an account. This can lead to some confusion when one seeks the reason for being denied a new account. Fortunately, anyone who has been blocked from opening an account at a financial institution due to the involvement of Chex Systems can request a copy of their Chex Systems file and use the information provided on our website to begin banking again quickly.

Telecheck

Commonly referred to as the second of the three major "Check Systems" in the U.S., Telecheck is a database service that allows participant merchants to screen the checks of customers and thereby avoid the negative consequences of bad check writing. A bad check cannot be redeemed for any money. Sometimes individuals intentionally write these fraudulently in order to gain access to goods and services without actually having to pay any money. Other times, bad checks are written simply because the customer has mismanaged his or her finances. In either case, bad checks hurt the merchant. This is why many businesses have decided to forego accepting checks altogether; the risk of losing money by accepting fraudulent checks is simply too great. Unfortunately, many customers prefer paying with checks. By not accepting checks, therefore, a merchant can lose out on a great number of sales. Many have already faced the following dilemma: Either money is lost through accepting bad checks, or money is lost through decreased sales. This is where Telecheck steps in.

By offering a reliable check verification service, they allow merchants to accept checks from customers without having to risk losing money from the transaction. How does it work? Telecheck maintains a large database that is full of the records of bad check writers. In fact, they have over 50 million such records available. Before accepting a check, a merchant with access to this Telecheck database can easily find out whether the customer has a record of fraudulent or irresponsible activity. Yet simply lining up numbers against one another is not the best way to determine the validity of a payment. That's why TeleCheck also offers risk-analysis services that provide a more comprehensive snapshot of the check writer. For example, instead of only tapping into the so-called negative database of bad check writers, it also helps merchants to determine whether or not their customer is a "good" check writer. In addition, their program for managing risk features advanced mechanisms to predict the chances of a successful transaction, presumably based upon a comparison method that rates customers' stats against those of other check writers to determine the likelihood a good or bad check.

What is Scan?

Commonly referred to as the third of the three major "Check Systems" in the U.S.A, Scan

(Shared Check Authorization Network) is an active network of merchants and institutions that

provide instant check authorization to participant merchants in order to help businesses be

able to service this type of payment without having to risk bad check writing. It works by giving

real-time access to the SCAN database of bad check writers, and therefore allows merchants to

make an informed decision about whether or not to accept a check from the customer

presenting it


4. Deposit Insurance Protection

In the period 1929 to 1932, when the USA was in the thick of one of the worst financial crises of the last century, the Great Depression, scores of banks failed (some estimates put this number at over 11,000 banks) and hundreds of thousands of bank depositors lost their life time savings in the process. In the most recent financial crises witnessed in the U.S.A (beginning of year 2008), the number of bank failures has not been that dramatic but nevertheless very high by modern standards – 25 banks in 2008, 140 in 2009. However, the best part of the current spate of bank failures is that no single depositor has lost any money. How has this been made possible and who protects bank depositor’s money in the U.S.A.?

The Federal Deposit Insurance Corporation (FDIC) preserves and promotes public confidence in the U.S. financial system by insuring deposits in banks and thrift institutions for at least $250,000; by identifying, monitoring and addressing risks to the deposit insurance funds; and by limiting the effect on the economy when a bank or thrift institution fails.

An independent agency of the federal government, the FDIC was created in 1933 in response to the thousands of bank failures that occurred in the 1920s and early 1930s. Since the start of FDIC insurance on January 1, 1934, no depositor has lost a single cent of insured funds as a result of a failure. The FDIC receives no Congressional appropriations – it is funded by premiums that banks and thrift institutions pay for deposit insurance coverage and from earnings on investments in U.S. Treasury securities.

FDIC Coverage


The distinct ownership categories are

Single accounts (accounts not falling into any other category)

Certain retirement accounts (including Individual Retirement Accounts (IRAs))

Joint accounts (accounts with more than one owner with equal rights to withdraw)

Revocable trust accounts (containing the words "Payable on death", "In trust for", etc.)

Irrevocable trust accounts

Employee Benefit Plan accounts (deposits of a pension plan)

Corporation/Partnership/Unincorporated Association accounts

Government accounts What FDIC insures?

Savings, checking and other deposit accounts, when combined, are generally insured to $250,000 per depositor in each bank or thrift the FDIC insures. The standard insurance amount of $250,000 per depositor is in effect through December 31, 2013. On January 1, 2014, the standard insurance amount will return to $100,000 per depositor for all account categories except IRAs (Individual Retirement Accounts) and other certain retirement accounts, which will remain at $250,000 per depositor.

The FDIC insures deposits only. FDIC insurance covers all deposit accounts at insured banks and savings associations, including checking, NOW, and savings accounts, money market deposit accounts and certificates of deposit (CDs) up to the insurance limit.

What FDIC does not insure? The FDIC does not insure the money you invest in stocks, bonds, mutual funds, life insurance financial institution like a insured bank or savings association. The contents of a safe deposit box are not insured by the FDIC.

FDIC Deposit Insurance Coverage Limits


5. Retail Banking Transactions

A transaction deposit is a type of bank deposit. This type of deposit is liquid, which means the

person who makes a transaction deposit may access his money without delay or restrictions. For

example, a deposit into a checking account is usually a transaction deposit. A person with this

type of account can withdraw against his deposit whenever he wants to as long as the funds are

available. A savings account, on the other hand, may restrict the number or amount of

withdrawals a person may make or institute a waiting period for accessing funds and may not be

considered a transaction deposit account.

A person who has a transaction deposit account may use it in a number of ways. He may initiate

electronic transfers of the funds in his account or even set up automatic withdrawals of the

money. Often, withdrawals can be made from these accounts using telephone authorizations as

well. A person who has this kind of account may write checks on the money held within it, use

other types of instruments to withdraw his money, or use the money in his account to pay others

electronically.

In contrast, some accounts limit users to six or fewer transfers or withdrawals per month and may

have strict limitations for withdrawals from automatic teller machines or payments using a debit

card. These accounts are often labeled as savings deposits rather than transaction deposits. It is

worth noting that having a transaction deposit doesn’t always mean the account holder has 100-

percent access to his money. For example, a bank may hold the depositor’s check for one or more

business days while making sure the funds will be paid by the paying bank. In some cases, the bank

may allow the depositor to withdraw a percentage of the deposit or a predetermined amount

while waiting for the check to clear. In the case of longstanding accounts, the wait time for fund

release may be much shorter. In spite of these the money in these accounts is still considered

liquid.

While savings deposit accounts typically place restrictions on when and how account holders can

access their money, this doesn’t mean account holders are stuck if they need to exceed

transaction limits or restrictions. In some cases, the bank will process additional transactions but

charge the account holder a fee for doing so. For example, it may charge a small fee if the

account holder makes more than six automatic teller machine (ATM) withdrawals in one month.

All transactional accounts offer itemized lists of all financial transactions, either through a bank

statement or a passbook. A transactional account allows the account holder to make or receive

payments by:

Cash money (coins and banknotes) - Deposits and withdrawal

Cheque and money order (paper instruction to pay)

Giro (funds transfer, direct deposit)

Direct debit (pre-authorized debit)

SWIFT: International account to account transfer

Standing order (automatic funds transfer)

ATM card or debit card (cashless direct payment at a store or merchant)

Online transactions

http://en.wikipedia.org/wiki/Money_order


Cash Deposits:

More than 2,500 years after the first use of coins as payment tokens, cash remains the most

common payment method.

The most popular method of depositing funds into a checking account is going directly to the bank. Banks have several different forms to fill out, but one should choose the checking deposit slip. Fill the following details in the deposit slip Name Address Current date Account number State City and The amount of money one is depositing into the account. Instead of waiting in long lines at a branch, one can use an ATM machine, which offers a quick way

to deposit money in your account. The only thing one needs to do is put their ATM card in the

machine, type in their PIN (personal identification number) and select their checking account and

the amount of money one is depositing. There are envelopes available at the ATM, fill out a

deposit slip with name, address, current date, account number, state, city and the amount of

money you are depositing to your account, insert it in the envelope with your deposit, and then

put the envelope in the slot. One will probably have to wait for a few moments for the deposit to

be processed; then will receive a receipt.

If you have a bank account added to PayPal, you can easily transfer your funds directly to your bank. Just go to the PayPal website and click on the "Account" tab. Then go to the "Withdraw" tab. click the "Transfer to Bank Account" link, type in the amount of money you are sending to the bank account and press "Continue." You will see details of your transaction. After reviewing them, click the "Submit" button. Your deposit will be pending for a day or more, depending on your bank's policy.

Cash Withdrawals

Withdraw at a Bank: To make a withdrawal at your bank, one will need to fill out a withdrawal slip that has your name, account number and the amount you want. If you don't have a book of withdrawal slips, you can get one at the bank. Take your withdrawal slip to the teller and provide any needed identification.

Withdraw at an ATM: To do this, one need to already have a debit card set up with your bank to use at an ATM. Usually, using an ATM affiliated with your bank is best; however, most cash machines will work but you might incur fees from the ATM owner and/or your bank. Insert your card and enter your PIN number. Follow the on-screen instructions. If you have more than one account (like both checking and savings) you need to specify which account you want the money to come from.

Cheques and Bankers Drafts Cheques: Cheques are written orders from account holders instructing their banks to pay specified sums of money to named beneficiaries. They are not legal tender but are legal documents


Bankers Drafts: Bankers' drafts are cheques drawn directly on the account of a bank rather than the account of a customer. They provide added assurance as the bankers’ drafts are unlikely to be returned unpaid due to lack of funds. However, it is important to note that they do not provide a guarantee against fraudulent use. For example, they may be lost or stolen and then used fraudulently.

Financial institutions clear and settle checks in different ways depending on whether the checks are “on-us” checks (checks deposited at the same institution on which they are drawn) or interbank checks (the payer and payee have accounts at different financial institutions). On-us checks do not require interbank clearing or settlement. Interbank checks can clear and settle through direct presentment, a correspondent bank, a clearinghouse, or other intermediaries such as the Federal Reserve Banks.

Under direct presentment, depositary financial institutions can present checks directly to the paying financial institution. The paying financial institution may settle with the depositary financial institution through a pre-arranged settlement agreement or settle by sending Fedwire funds transfers through the Federal Reserve Banks.

Correspondent banks, acting on behalf of other depository financial institutions, can settle the checks they collect for other institutions, known as respondents, by using accounts on their books or using their Federal Reserve Bank reserve account.

Financial institutions can also clear checks through a Federal Reserve Bank or an independent clearinghouse, where they have formed voluntary associations that establish an exchange for checks drawn on those financial institutions. Typically, financial institutions participating in check clearinghouses use the Federal Reserve’s National Settlement Service to effect settlement for checks exchanged each business day. There are approximately 150 check clearinghouse associations in the United States. Smaller depository institutions typically use the check collection services of correspondent banks or the Federal Reserve Banks.

Check Clearing and Settlement

Legend: Solid lines represent the flow of information and dashed lines represent the flow of funds.


The above figure depicts the typical interbank check clearing and settlement process through a Federal Reserve Bank or clearinghouse. In step 1 the consumer uses a check to pay a merchant for goods or services. The merchant, after authorizing the check, accepts the check for payment. At the end of the day, the merchant accumulates the checks and deposits them with its financial institution for collection (steps 2 and 3). Depending on the location of the paying institution, the funds may not be immediately available. For deposited checks payable at other financial institutions, the merchant’s financial institution uses direct presentment for processing or sends the checks to a Federal Reserve Bank, clearinghouse, or correspondent bank (steps 4 and 6). The check or an electronic presentment file is sent to the consumer’s financial institution, and the financial institution’s account at the correspondent, clearinghouse, or Federal Reserve Bank is debited (steps 5 and 7).

Check 21 allows banks to create and process a substitute check, also known as an Image

Replacement Document (IRD) in lieu of an original check. Its purpose is to improve the speed and

reliability of the check-clearing process by taking as much of the paper out of the process as

possible. It helped develop the Substitute Check that is the legal equivalent of the original check

and it is the electronic copy or image of the original check.

Direct Deposit and Direct Debit Direct Deposit: The deposit of funds directly into a bank account as a form of payment. Common

uses for direct deposit include paychecks and tax refunds.

Direct deposit is a banking option that allows for the transfer of funds without the hassle associated with paper checks. Direct deposit is very common in the United States. In fact, research shows that over 145 million Americans use direct deposit on a regular basis. Many businesses offer their employees the option of using direct deposit to receive their paychecks. The IRS allows taxpayers to receive refunds via direct deposit. Social Security, unemployment compensation, and other government benefits may also be available with the direct deposit option.

Setting up direct deposit: Establishing direct deposit of your paycheck requires you to go through your employer, who will have the paperwork needed to set it up. Your employer will want your Social Security number and a voided check from your checkbook containing your bank's routing number (a number assigned by the Federal Reserve to identify your bank) and your account number. The routing number is the first set of numbers on the bottom left of your check. The routing number is followed by your account number and the number of the check itself.

The voucher system: it may take a pay period or two for direct deposit to kick in. After it does, instead of your regular paycheck, you will receive a voucher from your employer stating how much was deposited to your account. The voucher will look similar to a real check, with all the same information on taxes, benefits and other deductions that were on your paper paycheck.

Arranging direct deposit of most federal paychecks may be done over the phone or at your local federal building. The agency -- whether it's Social Security, Veterans Administration or some other branch -- will need your checking account number and your bank's routing number. You will get a follow-up letter confirming the change in your method of payment


The benefits of direct deposit

There are no checks to be lost or stolen.

Payments reach your account the day the check is issued -- even if you are out of town, sick or unable to get to your financial institution.

Many banks offer free or lower-cost checking for customers with direct deposit because it saves them the cost of processing paper checks.

Direct deposit can help you avoid bouncing checks because the deposit is direct and on time.

Direct deposit can help you avoid bouncing checks because the deposit is direct and on time.

The federal government and many employers will deposit your check a day early if the regular payday falls on a holiday.

Direct Debit: A direct debit or direct withdrawal is type of preauthorized payment under which an account holder authorizes a bank to pay variable amounts (such as those called for in bills or invoices) directly to a landlord, bank, supplier or utility company at regular (usually monthly) intervals .It is similar to a direct deposit but initiated by the beneficiary. It is also called pre-authorized debit (PAD) or pre-authorized payment (PAP). In the United States, direct debit usually means an Automated Clearing House (ACH) transfer from a bank account to a biller, initiated by the biller. It is typical to use these pulled collections to make recurring payments for credit card or utility bills. Unlike standing orders, which require the amounts to be fixed, direct debits can be used for varying amounts, and are more similar to direct deposits, which are initiated by the payer. With direct debits, the payee can simply indicate a different amount each time.

Setting Up a Direct Debit Arrangement

You can use Direct Debit to pay for utility services such as gas, electricity, water, telephone, council tax and TV license. You can also pay bills such as mortgage repayments and loans by Direct Debit.

To set one up, one needs to request a Direct Debit Instruction from the organization that you wish to pay.

Once you have given them your account details, they will be able to send the Direct Debit Instruction to the bank and direct debit starts to debit your account

Money Transfers Bank wire is a communication system that allows banks to share information about transactions. When you do a wire transfer, information about the transfer is sent via bank wire. Sometimes the term bank wire is used to refer to a wire transfer - the actual sending and receiving of money as opposed to information. Bank wire is a system used when sending money to another bank electronically. Because they are fast, secure, and reliable, bank wires are used for important transfers and information exchanges. Wire transfer or credit transfer is a method of transferring money from one person or institution (entity) to another. A wire transfer can be made from one bank account to another bank account Domestic bank-to-bank transfers are conducted through the Fedwire system, which uses the Federal Reserve System and its assignment of American Banking Association (ABA) routing transit number, which uniquely identify each bank. The actual transfer is done by the bank, and neither the sender nor the recipient of the money sees or touches the actual funds.


International Transfers: Most international transfers are executed through SWIF, which operates a global network to facilitate the transfer of financial messages. Using these messages, banks can exchange data for funds transfer between financial institutions. Each financial institution is provided an ISO 9362 code, also called a Bank Identifier Code (BIC) or SWIFT Code. These codes generally are eight characters long. IBAN # is needed when sending money to Europe.

Standing Instructions A Standing Instruction (SI) is a remittance service by which a customer can instruct a Bank to affect regular funds transfers at pre-set timings and amounts from the customer's deposit account to designated beneficiary account(s). Standing instruction has element of permanence in it. It remains in force for all time to come till repealed The S/I service can be used to effect:

Repayment of loans

Payment of bills / insurance premiums, etc

Salary payments

Inter-account transfer of funds

Payment of safe deposit box rental and many more Standing Instructions are distinct from direct debits; both are methods of setting up repeated transfers of money from one account to another, but they operate in different ways. The fundamental difference is that standing orders send payments arranged by the payer, while direct debits are specified and collected by the payee. A standing Instruction can only be set up and modified by the payer, and is for amounts specified by the payer to be paid at specified times (usually a fixed amount at a specified interval). The amount can be paid into any bank account, which need not belong to an organization vetted by the payer's bank.

Stop Payments After issuance of a cheque, subsequent notice by drawer to the drawee or the Bank for stoppage of payment is known as stop payment. When a bank account holder instructs his or her financial institution not to honor payment. There are several reasons you may need to have your bank stop payment on a check. The person you wrote the check to may have lost it, it may have been stolen, or you may be told by the person you wrote it to that it has not been received. Or you may have written a check in error and need to stop the check from being cashed.

Online Bill Pay Types of Online Bill Pay: Several different services are described as online bill pay:

Online bill pay offered by your bank

Online bill pay offered by your service providers (phone company, mortgage company, etc) The first type of online bill pay (online bill pay offered by your bank) is a service that sends money out of your bank account to whoever you wish. In some cases these online bill pay services will actually print a check and mail it to the recipient. If the company you want to send payments


to is setup within the banks system, the bank will simply transfer the money electronically when you use online bill pay. To set up this type of online bill pay you’ll probably just need a copy of the bill that your service provider sends you. Set up a new payee in the name of that company at your online bill pay website. Copy the address and your account number, and enter that information too. Each time you want to pay you’ll just enter the amount of the bill and you’re done. The bank will print and mail a check that will pull money from your account. To be safe, you should double check with the payees if they have specific instructions for receiving payments via online bill pay. Some payees will not recognize the check (because it was printed by the online bill pay service – it isn’t their standard return mail piece). In this case, they may give you an alternate address or other instructions. The second type of online bill pay (online bill pay offered by your service providers) is a service that will only allow you to pay one company – like your phone company for example. To set up online bill pay with the phone company, you’ll need to provide the company a voided check and one or two forms and authorizations. The process is very similar to direct deposit but they call it online bill pay or ACH debit. Automatic Online Bill Pay If you really like to automate things so that you don’t have to think about them, you can automate online bill pay. Almost all online bill pay services will allow you to set up recurring payments. For example, you can have the online bill pay service take care of your phone bill every month or your insurance every quarter. Another way you can let online bill pay run on auto-pilot is to allow your service providers to pull money out of your account without you having to click anywhere. In other words, the service provider just “asks” the online bill pay company for payment and the payment is made without any activity on your part. If you authorize these types of payments, make sure you have a good handle on your budget and available funds.

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