Banking Procedures and Services

Banking Procedures and Services
Chapter 12 Banking Procedures and Services © 2010 Pearson Education, Inc. All rights reserved

Learning Objectives Explain the difference between different types of financial institutions Learn the basics of having a checking account, including how to balance an account Describe other available banking services Describe the two major federal insurers Explain the function and goals of the Federal Reserve © 2010 Pearson Education, Inc. All rights reserved

Banks and Financial Institutions
Banks and other financial institutions offer services such as providing personal loans and accepting deposits Most offer accounts that allow you to draft payments There are two major types of financial institutions: Depository institutions Nondepository institutions Remind students that these institutions are a critical component to our personal financial plan and are important to the overall economy © 2010 Pearson Education, Inc. All rights reserved

Depository Institutions
Depository institutions are financial institutions that provide traditional checking and savings account for individuals and business. They also provide loans Depository institutions take in and secure people’s money This money is loaned to people and businesses in the community Types of depository institutions include: commercial banks savings banks credit unions Explain depository institutions and how they serve a similar function but they differ in terms of the government regulations under which they operate. © 2010 Pearson Education, Inc. All rights reserved

Depository Institutions
Depository institutions generally pay interest on the deposits people leave with them The deposits are used to make loans, on which they charge an even higher rate of interest They also make money by charging various fees for services, such as overdraft protection Explain how depository institutions make money. Another common fee is the monthly fee many people pay for their checking account © 2010 Pearson Education, Inc. All rights reserved

Nondepository Institutions
Nondepository institutions consist of institutions that provide certain financial services but do not accept traditional deposits Nondepository institutions include: insurance companies finance companies securities firms investment companies Discuss the difference between depository institutions and nondepository institutions. While both provide financial services, nondepository institutions do not accept traditional deposits. © 2010 Pearson Education, Inc. All rights reserved

Choosing a Bank Automatic teller machines (ATMs) are machines where you take cash out from your bank account. Depository institutions can differ on fees charge, interest rates paid on deposits, and access to ATMs and branches There can be significant fees charged from ATMs that are not within your bank’s network Some internet banks pay a higher deposit rate, but they also provide limited access Explain the importance of doing the research to find out what bank is right for you. What is important to you might not be as important to someone else. You need to consider all the different features. © 2010 Pearson Education, Inc. All rights reserved

Check Your Financial IQ
What are two types of financial institutions? © 2010 Pearson Education, Inc. All rights reserved

Banking Basics: Checking Accounts
One of the more widely used banking services is the checking account It is also a service that can lead to trouble if not managed carefully Discuss how common checking accounts are. It is required by many utilities and places you might rent from. © 2010 Pearson Education, Inc. All rights reserved

How Checking Accounts Work
When you write a check for someone, that person “cashes” the check at your bank The bank takes the money out of your account and gives it to the person This process often happens electronically See figure 12.1 to see a sample check and an explanation of its parts Checking account is an account at a bank into which you deposit money and withdraw money by writing checks or using a debit card Check is a written order from you to your bank instructing it to pay money from your account to another party Explain the concept of writing a check. You are giving someone a ticket to get some money from you bank account. Discuss online banking. It’s this process happening electronically. It’s very common today. © 2010 Pearson Education, Inc. All rights reserved

How Checking Accounts Work
We open checking accounts because it allows us to have an accurate payment record It also allows us to carry less cash Checks also make it safer to send payment via the mail Checks can only be cashed by the person it is written out to Discuss the importance of maintaining complete records. Record everything! It must be timely, accurate, and complete. © 2010 Pearson Education, Inc. All rights reserved

Math for Personal Finance
Jim’s checking account balance was $ at the beginning of the month. He deposited a $50 check he earned form mowing lawn and wrote a check for $ His monthly service fee was $8. What is Jim’s new account balance? © 2010 Pearson Education, Inc. All rights reserved

NOW Accounts Negotiable order of withdrawal (NOW) accounts function much like checking accounts except they pay a small amount of interest on money in the account Money kept in ordinary checking accounts do not usually earn interest You can earn interest on NOW accounts NOW accounts require you to maintain a minimum balance in order to earn interest Discuss advantages and disadvantages of NOW accounts. While they accrue interest, you will have to maintain a minimum balance in order to keep the account open. © 2010 Pearson Education, Inc. All rights reserved

Debit Cards Many banks provide debit cards to their account holders
Debit card enables you to withdraw cash from your account at ATMs, or to pay directly for goods or services at businesses Many banks provide debit cards to their account holders A debit card looks like a credit card, but works differently There is no credit involved The amount of money is withdrawn immediately from your account Explain how debit cards work. They are convenient but easy to lose track and over draw. © 2010 Pearson Education, Inc. All rights reserved

Debit Cards Debit cards are convenient but can make it easy to spend money Record debit card withdrawals and purchases in your check register Debit cards require you to use a personal identification number (PIN) Be careful with your PIN. No one should know it but you. Personal identification number (PIN) are usually four-digit numbers that you need to memorize in order to be able to use your debit card Discuss the importance of keeping track of your debit card usage. Each debit card receipt is a check—it must be recorded in your registry for accurate account management. It will help you maintain your balance. © 2010 Pearson Education, Inc. All rights reserved

Tucker used his debit card to withdraw $40 cash from his account. However, he used an out-of=network ATM that charged him $2.50, and his own bank charged another $2 for the out-of-network withdrawal. How much will his account be charged in total? © 2010 Pearson Education, Inc. All rights reserved

Using Your Checking Account
Check register is a small ledger the bank will provide you for keeping track of your account balance The amount you open an account with is your balance Record that amount in your check register Record all checks and debit card purchases/withdrawals in the register. Explain how to use a check register. Subtract each check, withdrawal, or purchase from your balance, giving you a new balance If you make another deposit, you add that amount and update your balance © 2010 Pearson Education, Inc. All rights reserved

Using Your Checking Accounts
Keeping an accurate balance is essential Some checking accounts have overdraft protection The bank will cash up to a certain amount even if you do not have money in your account You will have to pay back the bank and pay a fee Discuss how keeping an accurate balance is essential. You could overdraw if you don’t. © 2010 Pearson Education, Inc. All rights reserved

Using Your Checking Accounts
Some checking accounts do not have overdraft protection If you overdraw such an account, the bank will not cash any checks They will charge you a fee for overdrawing your account Most businesses will also charge you a fee for writing them a bad check Discuss what happens when you overdraw an account that doesn’t have overdraft protection. Not only will the bank charge you a fee, but the business you wrote the check to will as well. © 2010 Pearson Education, Inc. All rights reserved

Balancing Your Account
It is possible for errors—yours or the bank’s—to occur. You should regularly compare your records to the bank’s. (see figure 12.2) At the end of each month the bank will send you a bank statement This lists the bank’s records of all the deposits and checks written against your account Discuss the importance of discovering these errors. They could be your fault or the banks. It is important to compare your record with the banks every month. © 2010 Pearson Education, Inc. All rights reserved

Mary Beth’s checking account balance on her bank statement shows $ However, she wrote checks for $41.78 and $12.10 that have not cleared the bank yet. How much do Mary Beth’s outstanding checks total? © 2010 Pearson Education, Inc. All rights reserved

Other Banking Services
Banks offer a variety of different services besides checking and savings accounts A few of them are discussed on the following slides Become familiar with these services as they can help with your financial planning Discuss how banks offer many more services than the standard checking and savings accounts. They offer many other services to help manage your finances more conveniently (at a cost, of course) © 2010 Pearson Education, Inc. All rights reserved

Safety Deposit Box Safety deposit boxes are small containers located inside the bank vault and are used to store valuable documents Safety deposit boxes are usually available for rent at most banks Safety deposit boxes usually contain wills and small objects such as jewelry, rare coins, and legal documents Explain what safety deposit boxes are used for. Items you don’t feel safe keeping at home. The bank typically guarantees against fire and other accidents more common at home and give access only to you with the key they issue. © 2010 Pearson Education, Inc. All rights reserved

Cashier’s Checks, Money Orders, and Travelers Checks
Cashier’s check is a type of check that is written to a specific payee but charged against the bank instead of your account Banks are also a source of cashier’s checks When you buys a cashier’s check, the bank takes the money out of your account immediately These types of checks are accepted in situations when a personal check is not Explain how cashier’s checks work. There may be situations where your personal check might not be accepted and a cashier’s check would be. Tell students to be cautious though. Verify the existence of the bank first. Explain what cashier’s checks are often used for: larger purchases, when one party does not know the other well enough to accept a personal check. Explain that the recipient of the cashier’s check does not have to worry about whether you have enough money in your account © 2010 Pearson Education, Inc. All rights reserved

Money orders are purchased for cash so that the recipient can trust that they are worth what they say they are Money orders function similar to cashier’s checks The US Postal Service sells money orders for a fee Money orders are also common when you buys something online. The seller does not have to wait for your check to clear when using a money order. Tell students to be cautious of money orders as well. Verify the bank first. © 2010 Pearson Education, Inc. All rights reserved

Travelers checks are checks written by a large financial institution with no payee specified People pay for travelers checks in advance The recipient can be confident that the check will be cashed Travelers checks are accepted around the world Travelers who lost travelers checks can usually replace them Discuss advantages of traveler’s checks. They are accepted around the world and they can be replaced if they are lost. © 2010 Pearson Education, Inc. All rights reserved

Arrangements for Credit Payments
Bank drafts occur when you authorize someone to take money out of your bank account automatically to satisfy some financial obligation Bank drafts are used to make car and house payments, and to pay utility bills People use bank drafts to contribute to retirement accounts and other investments Bank drafts help you pay off borrowed money in a timely manner Discuss how bank drafts are becoming highly prevalent for paying loans and other bills electronically. © 2010 Pearson Education, Inc. All rights reserved

Arrangements for Credit Payment
Electronic funds transfer is whenever you authorize someone to access your bank account for payment or for deposit Bank drafts are an example of electronic funds transfer A bank draft authorization will set a specific date on which the money is taken from your account With bank drafts, you do not have to write a check every month Make sure to record all bank drafts and transfers in your check register Discuss how electronic funds transfers work. Be cautious of setting them up and the date you choose to have them withdrawn. Some utilities and other places may not accept electronic transfers. © 2010 Pearson Education, Inc. All rights reserved

Other Online Services Most banks now offer a variety of online services, such as: having payments drafted directly out of your account utilize online bill payment services transfer funds between checking and savings accounts make loan applications check your bank statements © 2010 Pearson Education, Inc. All rights reserved

Deposit Insurance One of the reasons to put money in the bank is to keep it safe If the institution went bankrupt, you would want your money to be protected Most financial institutions have deposit insurance on the first $250,000 you have on deposit. The major federal insurers are: Federal Deposit Insurance Corporation (FDIC) National Credit Union Savings Insurance Fund (NCUSIF) Discuss the reasons for deposit insurance. It protects your money. © 2010 Pearson Education, Inc. All rights reserved

FDIC The federal government created the FDIC in 1933 during the Great Depression The bank failures caused people to take their money out of even healthy institutions This reaction hurt the banks and reduced the amount of money available for borrowing The government needed a way to restore faith in the banking system Discuss the importance of having confidence in the banking system. This type of reaction does not help the economy. © 2010 Pearson Education, Inc. All rights reserved

FDIC Saving money is critical to economic growth
If there is no money deposited in the banks, businesses cannot borrow Currently, the FDIC provides deposit insurance on the first $250,000 of deposits at insured institutions FDIC insurance covers checking accounts, savings accounts, NOW accounts, and certificates of deposit Explain how the FDIC was meant to restore and maintain depositors’ confidence in the banks by insuring people’s deposits against loss Tell the students that the amount was $100,000 per insured account until the passage of the Emergency Economic Stabilization Act of 2008 passed in October 2008, increasing the coverage to $250,000 through December 31, 2009 © 2010 Pearson Education, Inc. All rights reserved

NCUSIF The National Credit Union Association (NCUA) supervises credit unions It provides deposit insurance with the same limits as FDIC insured deposits This program is also backed by the federal government Credit unions functions similarly to a bank, but unlike a bank, a credit union has nonprofit status and is owned by its members Remind students of the importance of faith in the financial system. With the federal government backing the NCUSIF, it can help people feel safe with their money. © 2010 Pearson Education, Inc. All rights reserved

The Federal Reserve and Banking System
The bank is part of a larger system that plays a central role in the nation’s economy At the heart of that banking system is the Federal Reserve System The Fed, as it is known, helps regulate our banking system and our whole economy Introduce the topic of the Fed and the importance of it. © 2010 Pearson Education, Inc. All rights reserved

Multiple Roles The Federal Reserve Act of 1913 created the Federal Reserve System The Fed regulates banks and carries out the nation’s economic policies The Fed’s major economic goals are to create ongoing economic growth, encourage full employment, and promote price stability The Fed uses monetary policy in order to achieve these goals Federal Reserve System serves as the central bank of the United States Explain how the Fed regulates banks. The Fed makes sure that banks follow rules and practices designed to ensure a sound banking system. © 2010 Pearson Education, Inc. All rights reserved

Price Stability The main goal of Fed policy is price level stability
Inflation means the prices of goods and services are going up Inflation is considered problematic to the government and the Fed because it harms businesses and individuals in our economy Price level stability means making sure that we don’t have inflation (or deflation) Inflation is defined as a sustained increase in the general level of prices Discuss why the Fed would want to have price level stability. If price levels are not stable and inflation occurs, prices go up and can harm businesses and individuals. Ask students how inflation would affect them. What if prices went up but their pay did not? © 2010 Pearson Education, Inc. All rights reserved

Monetary Policy The Fed uses monetary policy as its primary tool to fight inflation and promote a healthy economy The money we currently use in the United States is known as fiat money With fiat money, a five-dollar bill is worth five dollars because the government says it is Monetary policy involves the raising or lowering of the money supply to achieve some goal Fiat money has value not because the coins and bills have some value in their own right, but because the government orders that it be accepted as payment Discuss how the main goal of the Fed is to control inflation by growing or shrinking the supply of money—creating a supply/demand type issue © 2010 Pearson Education, Inc. All rights reserved

Monetary Policy The government must control how much of that paper and coin is circulating in the economy The United States Treasury is in charge of printing money and minting coins The Fed is the agency in charge of determining how much money is in circulation Discuss why the Fed controls the money in circulation. If there is too much money circulating, it will have less value. This might lead to inflation. © 2010 Pearson Education, Inc. All rights reserved

Monetary Policy Physical money in circulation is the most visible part of the money supply There is a lot of electronic money that we never see As the economy grows and more people need money to make purchases, the Fed expands the money supply This includes more electronic money, paper money, and coins (see figure 12.3) Give examples of electronic money – payments done online (electronic funds transfer), etc © 2010 Pearson Education, Inc. All rights reserved

Monetary Policy The Fed uses monetary policy to change interest rates and impact buying behavior If the Fed wants to encourage people to spend more money, it increases the money supply When more money is available, it drives interest rates down and encourages spending When the Fed reduces the money supply, interest rates go up Explain how in order to shrink the money supply, interest rates are raised thus making it more expensive to borrow. This means fewer people will borrow/spend. If fewer people are buying, prices must be kept down to get people to buy. When interest rates fall, more people are borrowing and spending meaning more people are buying the same product, which means prices can inflate due to the willingness of people to spend. © 2010 Pearson Education, Inc. All rights reserved

Monetary Policy If the Fed shrinks the money supply, people will compete for an item (money) that’s in limited supply The price of that money (interest rates) will go up If the Fed is concerned about inflation, it will shrink the money supply This will drive up the price of money and discourage spending, which should slow inflation © 2010 Pearson Education, Inc. All rights reserved

Monetary Policy The Fed uses the money supply to impact interest rates
A Discount rate occurs when the Fed changes the interest rate it charges to the banks when it loans them money The Fed uses the money supply to impact interest rates Banks use the option of borrowing money from the Fed only on occasion Either of these actions are designed to slow the economy or stimulate the economy Explain how this all depends on what the Fed determines is needed at this time – to slow the economy or stimulate it. © 2010 Pearson Education, Inc. All rights reserved

Monetary Policy The Fed has to maintain a balance
It wants enough money in the economy to encourage economic growth, but not too much because to cause inflation Keep the Fed’s overall goals in mind: stable prices, economic growth, and full employment Remind students that they will see the Fed in the news a lot. © 2010 Pearson Education, Inc. All rights reserved

Summary Banks and other financial institutions offer individual services such as: making personal loans accepting deposits providing accounts that allow you to draft payments There are two types of institutions: Depository institutions Nondepository institutions © 2010 Pearson Education, Inc. All rights reserved

Summary One of the most widely used banking services is the checking account Checking accounts allow us to have an accurate record of our payments and to carry less check Many banks provide debit cards to their checking account holders A debit card enables you to withdraw cash from your checking account © 2010 Pearson Education, Inc. All rights reserved

Summary Other services provided by banking institutions are the following: Safety deposit boxes Cashier’s checks Money orders Travelers checks Banks also offer services for credit payment © 2010 Pearson Education, Inc. All rights reserved

Summary The FDIC and NCUSIF are two major insurers for most financial institutions Most financial institutions have deposit insurance to protect your money up to some maximum amount © 2010 Pearson Education, Inc. All rights reserved

Summary The Fed is the heart of the banking system and regulates banking and the whole economy The Fed’s major economic goals are to: create ongoing economic growth encourage full employment promote price stability The Fed uses monetary policy to help accomplish these goals © 2010 Pearson Education, Inc. All rights reserved

Key Terms and Vocabulary
Automatic Teller Machine (ATM) Bank draft Cashier’s check Check Check register Checking account Credit union Debit card Depository institutions Discount rate Electronic funds transfer Federal Deposit Insurance Corporation( FDIC) Federal Reserve System Fiat money Inflation Monetary policy Money orders National Credit Union Savings Insurance Fund (NCUSIF) Negotiable order of withdrawal (NOW) accounts Nondepository institutions Personal identification number (PIN) Price level stability Safety deposit boxes Travelers checks © 2010 Pearson Education, Inc. All rights reserved

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