 2004 McGraw-Hill Ryerson Ltd. Kapoor Dlabay Hughes Ahmad Prepared by Cyndi Hornby, Fanshawe College Chapter 4 The Banking Services of Financial Institutions 4-1

 2004 McGraw-Hill Ryerson Ltd. Learning Objectives - Chapter 4 1.Analyze factors that affect selection and use of financial services. 2.Compare the types of financial institutions. 3.Compare the costs and benefits of various savings plans. 4.Identify the factors used to evaluate different savings plans. 5.Compare the costs and benefits of different types of chequing accounts. 4-2

 2004 McGraw-Hill Ryerson Ltd. Learning Objective # 1 Analyze factors that affect selection and use of financial services. 4-3

 2004 McGraw-Hill Ryerson Ltd. A Strategy for Managing Cash Cash, cheque, credit card or debit card are the most common payment choices. Common mistakes in managing cash include… Overspending as a result of impulse buying and using credit cards. Not having enough liquid assets to pay current bills. Using savings or borrowing to pay for current expenses. Failing to put unneeded funds in an interest- earning savings account or investment plan. 4-4

 2004 McGraw-Hill Ryerson Ltd. Types of Financial Services Savings. Time deposits in savings and investment certificates. Payment services. Checking accounts commonly called demand deposits. Automatic payments. Borrowing - for the short- or long-term. Other financial services. Insurance, investment, real estate purchases, tax assistance, and financial planning are additional services you may use. 4-5

 2004 McGraw-Hill Ryerson Ltd. Electronic Banking Services Obtain cash. Check account balances. Transfer funds. Point-of-sale payments. Direct deposit of paycheques and other regular income. Preauthorized payments. Web “cyberbanking”. 4-6

 2004 McGraw-Hill Ryerson Ltd. Automated Teller Machines A computer terminal that allows customers to conduct banking transactions. To reduce ATM fees you can... Compare ATM fees before opening an account. Use your own bank’s ATM when possible. Purchase monthly service package the includes ATM transactions. Withdraw larger cash amounts as needed. Use personal cheques, traveler’s cheques, credit cards, and pre-paid cash cards when traveling. 4-7

 2004 McGraw-Hill Ryerson Ltd. Methods of Payments Point-of-sale transactions. Online card requires a PIN to authorize, and includes instant transfer from your account. Offline card transactions are processed like credit card charges. Stored-value cards. For phone cards, transit & library fees Smart cards have a microchip for prepaid goods and services and for data, such as your medical history, account balances, insurance information Electronic cash, ex

 2004 McGraw-Hill Ryerson Ltd. Opportunity Costs of Financial Services Higher rate of return may be obtained at the cost of lower liquidity. Convenience of a 24-hour ATM must be weighed against service fees. The “no fee” chequing account that requires a $500 non-interest-bearing minimum balance means lost interest of nearly $400 at 6 percent compounded over 10 years. 4-9

 2004 McGraw-Hill Ryerson Ltd. Financial Services and Economic Conditions Changing interest rates, rising consumer prices and other economic factors influence financial services.  When interest rates are rising... Long-term loans take advantage of current low rates. Short-term savings take advantage of higher rates when they mature.  When interest rates are falling... If you refinance loans, use short-term loans. Long-term savings “lock in” earnings at current high rates. 4-10

 2004 McGraw-Hill Ryerson Ltd. Learning Objective # 2 Compare the types of financial institutions. 4-11

 2004 McGraw-Hill Ryerson Ltd. Types of Financial Institutions Deposit type institutions Chartered Banks offer a full range of financial services Trust Companies also offer broad range of services as well as act as trustees Credit Unions / Caisses Populaires are user owned and non-profit financial institutions offering a range of services 4-12

 2004 McGraw-Hill Ryerson Ltd. Types of Financial Institutions Non-deposit type institutions. Life insurance companies offer insurance plus investment and retirement planning. Investment companies offer a money market fund. Mortgage and loan companies lend for home purchase. Pawnshops make loans on possessions. Cheque-cashing outlets charge 2-3%. Cyberbanking via phone and on-line with most financial institutions. 4-13

 2004 McGraw-Hill Ryerson Ltd. Comparing Financial Institutions Services offered Rates Fees & Charges Financial advice Safety (deposit insurance) Convenience and location Online services and special programs 4-14

 2004 McGraw-Hill Ryerson Ltd. Learning Objective # 3 Compare the costs and benefits of various savings plans. 4-15

 2004 McGraw-Hill Ryerson Ltd. Types of Savings Plans Regular savings accounts. Term Deposits and Guaranteed Investment Certificates (GICs) guaranteed rate of return short to long term maturity Interest earning chequing accounts. Money market accounts and funds. Canada Savings Bonds varying rate of return government guaranteed low minimum deposit 4-16

 2004 McGraw-Hill Ryerson Ltd. Learning Objective # 4 Identify the factors used to evaluate different savings plans. 4-17

 2004 McGraw-Hill Ryerson Ltd. Evaluating Savings Plans Rate of return or yield. Percentage increase in value due to interest. Compounding - interest on interest. Effective Annual Rate (EAR) calculates the effective return taking compounding into effect 4-18 EAR = (1 +km)m – 1 m = number of periods in year km = rate of return for one period

 2004 McGraw-Hill Ryerson Ltd. Evaluating Savings Plans Inflation – compare return with inflation rate Tax considerations Liquidity Safety Canadian Deposit Insurance Corporation (CDIC) insures up to $60,000 per person per financial institution Restrictions and Fees 4-19

 2004 McGraw-Hill Ryerson Ltd. Learning Objective # 5 Compare the costs and benefits of different types of chequing accounts. 4-20

 2004 McGraw-Hill Ryerson Ltd. Selecting Payment Methods Ninety percent of business transactions are conducted by cheque, making it a necessity for most people. Types of chequing accounts include... Regular chequing accounts Usually have a monthly service charge. Activity account. Charge a fee for each cheque written. Interest-Earning Chequing accounts require minimum balance 4-21

 2004 McGraw-Hill Ryerson Ltd. Evaluating Chequing Accounts Restrictions, such as a minimum balance. Fees, (which are increasing), and charges. Interest. Special services, such as phone banking and ATM machines. Overdraft protection. Automatic loan made to cover cheques written in excess of account balance 4-22

 2004 McGraw-Hill Ryerson Ltd. Other Payment Methods Certified cheque Personal cheque with guaranteed payment. Cashier’s cheque. Cheque of a financial institution you get by paying the face amount plus a fee. Money order. Purchase at financial institution, post office, store. Traveler’s cheque. Sign each cheque twice. Electronic traveler’s cheques - prepaid travel card with ability to get local currency at an ATM. 4-23

 2004 McGraw-Hill Ryerson Ltd. Chapter 4 - Appendix Using a Chequing Account Opening a Chequing Account individual / joint account (ad/or) require a signature card Making Deposits cheques being deposited require an endorsement - your signature on the back of a cheque –blank endorsement –restrictive endorsement –special endorsement 4-24

 2004 McGraw-Hill Ryerson Ltd. Chapter 4 - Appendix Using a Chequing Account Writing Cheques be sure to record all cheques written stop payment order necessary if cheques are lost or stolen Maintaining a Chequing Account reconcile bank statements –bring your cheque book and bank statement into agreement 4-25