Competency 4.02 Understand the Banking System 4.0 Understand the Role of Finance in Business Competency 4.02 Understand the Banking System Objective 4.02-A Analyze the roles/responsibilities of the Federal Reserve.

Topics Classification of financial institutions Depository Non-depository Common payment services Electronic Funds Transfers Online Bill Pay Checking Accounts Specialty checks Money Orders 2

Classification of Financial Institutions Depository Earns money to finance their business by accepting deposits from customers Types include: Commercial banks- full service - offer many different services, including savings, loans, and checking accounts. Savings and Loan associations (S&Ls) -traditionally specialize in savings and home loans, but now are very similar to commercial banks. Mutual savings banks- owned by the depositors and specialize in savings and home loans. Credit unions- not-for profit, serve their members only, and are owned by their depositors. 3

Classification of Financial Institutions Non-depository Earns money to finance their business by selling specific services such as policies, investments, and loans Types include: Life insurance companies -term, whole, universal Investment companies - stocks, bonds, mutual funds Consumer finance companies – higher rates if bad credit Mortgage companies – loan $ for land, buildings, homes Check-cashing outlets –fee based if do not have bank acct Pawnshops –loan $ based on value of item pawned 4

How To Compare Financial Institutions Which characteristics of financial institutions are of interest? Services offered Safety Convenience Fees and charges Restrictions What kinds of questions may be asked about each characteristic? 5

Comparative Questions Services – Does the institution offer needed services? Savings Depository for payroll taxes Checking Various options to meet customer needs Loans Short term - working capital Long term - mortgage Credit cards Debit cards Safe deposit boxes Trust management

Comparative Questions Safety – Is the institution insured against losses? Federal Deposit Insurance Corporation (FDIC) Created by Congress to maintain stability and public confidence in the nation’s financial system: insures deposits, supervises financial institutions National Credit Union Administration (NCUA) Charters and supervises credit unions

Comparative Questions Convenience – Does the institution offer the access desired? Physical locations available Online services Easy to access & use ATM machines

Comparative Questions Restrictions – Are there minimum balances that must be kept, or other restrictions? Minimum balance- $ amount required to stay in account at all times If account keeps minimum balance, fees are often waived (eliminated)

Comparative Questions Fees and Charges – What are the short and long-term costs of the services? Flat monthly fees Fees per transaction NSF (Non-sufficient funds) fees Checks written Debit transactions # of transactions allowed before fees begin Minimum balance required to eliminate fees

Common Payment Services Electronic Funds Transfers Online Bill Pay Checking Accounts Personal, business Specialty checks Certified, Cashier’s, Traveler’s Money Orders Postal, Express, Telegraphic

Online Bill Pay Use the web to make payments Often fee based Privacy can be issue Change PIN frequently Use only “safe” sites Write Online Bill Pay questions 1-3 from next slide on notebook paper. Use the website to answer the questions. http://banking.about.com/od/bankonline/f/setupbillpay.htm

Online Bill Pay Questions What are the two types of online bill pay? What is automatic bill pay? Choose link Banking 101 Choose link 3 reasons to avoid online banking. List 3 reasons given.

Common Payment Services - EFT Electronic Funds Transfer (EFT) Banking method in which computers and electronic technology is used as a substitute for checks and other paper forms of banking Electronic Funds Transfer Options: Automated Teller Machines (ATM’S) Pay-By-Phone Systems Direct Deposit or Withdrawals Paychecks, automated bill payment Point-of-Sale Transfers Debit Cards Automatic Deposits and Payments 14

Checking Accounts Used by business and individuals to manage cash transactions Check- A preprinted form issued by the financial institution Account holder directs withdrawals by writing checks Parties to a Check Payee, Drawee, Drawer

Last item completed on check! Parties to a Check Check Number Drawer’s Name & Address Joint Account ABA # Payee Check Date Melanie Paige Charles Paige 319 619 Main Street Raleigh, NC 27601 2-131/1034 July 16, 2010 Pay To the Order of _____Donnie Tatum______________________$100.50 _One hundred and 50/100 ---------------------------------------------------DOLLARS State Credit Union For _______________ Charles Paige 2131/1034:78434 234320 100.50 07-18-2010 2251 Drawer’s Signature - Last item completed on check! Bank Name - Drawee 16 Memo MICR Banking #s

Record Keeping IMPORTANT: Keep a current balance in check register or on check stub by: Recording deposits Recording withdrawals Checks written EFTs Bank Fees

Common Payment Services Special Checks Travelers check Requires 1st signature when check issued Requires 2nd signature when check used Go to link below and read about traveler’s checks and how they work. http://usa.visa.com/download/merchants/visa_travelers_cheques_acceptance.pdf

Traveler’s Checks Go to website Traveler’s Checks – Draft drawn by a well-known financial institution on itself or its agent, used when traveling Go to website http://www212.americanexpress.com/dsmlive/dsm/dom/us/en/personal/cardmember/additionalproductsandservices/giftcardsandtravelerscheques/travelerschequesandforeigncurrency.do?vgnextoid=6d17fc671492a110VgnVCM100000defaad94RCRD Write questions 1-3 on notebook paper. Use the website to answer the questions. Click on Learn More about Travelers Checks. List the 4 steps in how to use travelers checks. List 5 ways Travelers Checks mean Peace of Mind. What is the benefit of Cheques for Two?

Certified Check A certified check is written by a bank for you from your bank account to give to someone. It's guaranteed funds that the bank reserves from your account. Go to website: http://www.superpages.com/supertips/what-is-a-certified-check.html Write Certified Check questions 1-5 from next slide on notebook paper. Use the website to answer the questions.

Certified Check Questions Who issues a certified check? Give two examples of when you might need a certified check? Why can’t a certified check bounce? Why does a creditor require a certified check? Do banks charge a fee for a certified check?

Cashier’s Check Sample Cashier’s Check – A check the bank draws on itself

Common Payment Services Money Order Draft issued by a post office, bank, express company, or telegraph company for use in paying or transferring funds for the purchaser Orders issuing agency to pay amount printed on form to another party Types of Money Orders: Postal money order Express money order Telegraphic money order Go to website http://en.wikipedia.org/wiki/Money_order Write questions 1-5 from next slide on notebook paper. Use the website to answer the questions.

Money Order Questions For what amount of money is a money order issued? When was the Postal Order system established? What is a concern about using money orders? Who usually sells money orders in the United States? Name 5 security features of a postal money order.

Common payment services Opening a checking account Signing a signature card is the first step Writing a check for payment Endorsing a check for deposit An endorsement allows the payee to cash the check, deposit the check or transfer payment of the check to someone else. Different types of endorsements: Blank Full Restrictive 25

Check Endorsements Definition: Signature on the back of a check What does an endorsement do? Allows payee to cash, deposit or transfer payment of the check to someone else Provides proof that the payee cashed or transferred payment of the check to someone else How should a check be endorsed? Endorser (payee who is signing) should sign the check the way it is on the front of the check and if the name is misspelled, correct the signature directly up under the first endorsement 26 26

DO NOT WRITE BELOW THIS LINE Blank Endorsements Should match payee’s name Signed with endorser’s name only (endorser is payee from front of check) Can be cashed by anyone who holds the check with a blank endorsement! Don’t use blank endorsement before you are ready to cash or deposit! X Jane Doe DO NOT WRITE BELOW THIS LINE 27

Special Endorsement Juan Delgado Transfers payment of a check to someone else. Payee signs check , then writes “pay to the order of” another person Can be used to make payment on a debt Juan is payee on check Juan owes Maria money Juan transfers payment to Maria. Debt = money owed Might also endorse: Juan Delgado pay over to Maria Fernandez 28

Full Endorsement Example Transfers payment to someone else Payee signs the check over to another person to receive payment Who was payee on check? John X Pay to the order of Jane Doe John Doe DO NOT WRITE BELOW THIS LINE 29

Restrictive Endorsement Limits use of the check so it can be deposited only to endorser’s account. Safest type of endorsement Cannot be cashed by a thief or someone who finds the check Best to use when mailing a check for deposit or when using the ATM for deposit. 30

Check Writing Procedures Write information in the check register first, (ensure checks are written in numerical order) Write the date the check is written. Write the payee’s name. Write in the numerical amount of the check. Write in the amount of the check in words. Write in the purpose of the check. Sign the check. 31

How Do I Know the Amount in my Checking Account? Keep a Check Register or Check Stub Balance Subtract checks written (or debit card transactions) from balance Add deposits to balance Keep a running balance after writing checks or making deposits Check Register is YOUR documentation of how much money is in your account? What if mistakes are made? You will make corrections when you reconcile (balance) bank statement

Bank Reconciliation What is a bank reconciliation? Document that shows two equal balances Your record of your checking account The bank’s record of your account Do they have the same $ balance? Yes, or reconciliation is not complete! Reconciliation helps to find/correct any mistakes in your register! 33

Outstanding Checks What is an outstanding check? Outstanding checks are checks that have not cleared (been deducted from) the bank statement balance. Need to know items outstanding in order to reconcile statement How to know if checks are outstanding: Find out which checks /deposits are outstanding by comparing the bank statement with the checkbook register

Reconciling a Checkbook Makes sure the bank’s records agree with your records 1. Check for outstanding checks and deposits 2. Check the checks, deposits, ATM activity on the bank statement to make sure that your records are correct 3. Make adjustments to the bank statement and your records to ensure that you and the bank have the same amount of money 4. Reconcile every statement upon receipt 35

Steps in a Bank Reconciliation Obtain the monthly bank statement. Determine checks paid. Find differences between the monthly bank statement and monthly check register. Calculate the adjusted balance. If the balances do not agree, check the steps again and recalculate. Account balances must be equal! 36