Intro to Business

Unit Eight Financial Institutions & Banking Systems

Chapter 25The Banking System & Financial Services

GOALS Desribe the major types of deposit-type

and non-deposit financial institutions. Detail the services provided by the

financial industry. Outline the functions of the Federal

Reserve System Explain how banks earn money, help

communities, and create economic growth.

The Business of Banking Bank = business & You = customer A bank sells services such as checking

accounts, savings accounts, and loans. Banks earn most of their revenues by

charging for loans to individuals, businesses, and governments, and investments.

The Business of Banking People who wish to start a bank must meet

requirements set by federal & state governments.

They must: Be responsible citizens with high moral character Have enough capital Apply for a charter from their state or from the

federal government. Charter from state – operate as state bank Charter from federal government – operate as

a national bank

The Business of Banking Bank’s operations are regulated more

strictly than other businesses. Government regulation is necessary to

assure the safety of customers’ money. State banks – operate under state banking

laws National banks – operate under federal

and state laws.

Banks & Other Deposit-Type Institutions

Deposit-type institutions = depository institutions

They accept deposits for people and businesses to use in the future.

Main types of deposit-type institutions:1. Commercial banks2. Saving and loan associations3. Mutual savings banks4. Credit unions

Commercial Banks Most common Often called full-service banks because

they offer a wide range of financial services.

They offer:1. Checking accounts2. Savings accounts3. Loans to individuals & businesses4. Other services

Federal Deposit Insurance Corporations (FDIC) Federal agency that helps to regulate banks

and other financial institutions Protects depositors’ money in case of the

failure of a bank or financial institution that is regulated by FDIC.

Insures all accounts with an amount up to $100,000.

Although FDIC is a government agency, money for its operation is provided by banks.

99% of banks are FDIC members.

Savings & Loan Associations (S&L)

Specialized in savings accounts and making loans for home mortgages.

In recent years, many S&Ls have changed to savings banks and now include the words savings bank in their titles.

e.g. Lifetime Savings and Loan Association has become Lifetime Savings Bank.

Mutual Savings Bank Is organized mainly for savings accounts

and to make loans to home buyers.

Owned by depositors :- profits go to depositors.

Credit Unions A credit union is:

User-owned Not-for-profit Cooperative

Formed by people in the same: company, Government agency, Labor union, Profession, Church, or Community

Credit Unions Regulated by National Credit Union

Administration (NCUA) – federal agency similar to FDIC.

NCUA also insures depositor’s funds up to $100,000.

Non-Deposit Financial Institutions Life Insurance Companies Investment Companies Consumer Finance Companies Mortgage Companies Check-Cashing Outlets Pawnshops

Types of Financial Services Accepting Deposits Transferring Funds (EFT – Electronic Funds

Transfer) Lending Money Storing Valuables Providing Financial Advice and Investment

Services Managing Trusts

The Federal Reserve System (Fed)

Set up by federal government All national banks are required to join Fed,

and state banks may join. Banks that join are known as “member

banks”.

Federal Reserve Activities The government requires banks to keep a

certain amount of customers’ money on deposit with the Federal Reserve System in case additional funds are needed to meet the daily needs of their customers.

E.g. if a customer deposits $1,000 and the bank is required by the Federal Reserve System to hold 15% of all deposits in reserve, the bank can lend 85% of the deposit ($850).

Intro to Business

Unit Eight Financial Institutions & Banking Systems

Chapter 26Opening A Checking Account

GOALS Explain the difference between the two

major types of checking accounts

Detail the process of opening a checking account.

Define three types of endorsements and explain when each is used.

Advantages of a Checking Account Convenience

Write checks at home & pay bills online Safety

Money at home is at risk from fire, theft, carelessness, temptation to spend

Money in the bank is protected by FDIC Proof of Payment

A check is legal proof of payment Record of Finances

Every deposit you make / every check you write is recorded.

Where money is going / how much you have

Types of Checking Accounts Checking accounts differ:

from one bank to another from one part of the country to another in features they offer customers in costs

Comparison shopping for a checking account is necessary.

Service Charge: A fee a bank charges for handling a checking account

Types of Checking Accounts1. Regular Checking Account

2. Interest Checking Account

3. Special Checking Account

Regular Checking Account If you write a large number of checks Service charge is usually waived for

minimum / average monthly balances Minimum monthly balance is usually $300 or

higher Average monthly balance is the sum of the daily

balance divided by the number of days in the month

Some banks waive service charge if the depositor keeps a certain balance (e.g. $1000), in a savings account at the same bank.

Interest Checking Account Require a minimum monthly balance or an

average monthly balance of $500 or more If the account falls below the required

amount, the bank usually pays no interest AND will usually add a service charge to the account

Interest rate that banks pay their customers also vary.

Interest Checking Account A bank will offer a higher interest rate

when a higher balance is maintained. Interest rate may be tied to the current cost of

money in the marketplace known as money market rate.

Money market rate is the interest rate that big users of money, such as governments and large corporations, pay when they borrow money

Special Checking Account Basic charge is about 10 to 20 cents for

each check written.

May be a small monthly service charge for the account.

Credit unions may provide checking accounts for members.

Sharedrafts Members of credit unions are called

shareholders when they have money on deposit, and their checks are called sharedrafts.

Opening a Checking Account Take a paycheck or cash to the new

accounts desk in a financial institution.

The representative will help you: Sign a signature card Make your deposit Select your checks

Some banks require you to be 18 years or older to open a checking account.

The Signature Card A bank will deduct money from a checking

account to cover checks only when authorized to do so by the depositor.

Signature card is the bank’s official record of your signature. You must use the same signature on each

check write

Joint Account When two or more people have an account

together.

Each person who will write checks on the account must sign the signature card.

Making the First Deposit When you deposit money in a checking

account, you fill our a deposit slip deposit ticket.

Deposit slip is a form on which you list all items you are depositing – currency, coins, checks

Deposit slip shows: Your name Your account number The date The items deposited Total amount of the deposit

Understanding a Check

Understanding a Check

Endorsing Checks An endorsement is written evidence that

you received payment or that you transferred your right of receiving payment to someone else.

Purpose of Endorsing Checks When you endorse a check, your

responsibilities are almost as great as if you had written the check yourself.

3 Main Purposes of Endorsements:1. Endorsements allow the recipient of the check to

cash, deposit, or transfer it to someone else.2. Endorsements serve as legal evidence that the

receiver cashed or transferred the check to someone else

3. Endorsements mean that the endorser will pay the check in case the next owner of the check cannot collect the money.

Types of Endorsements3 Main Types of Endorsements:1. Blank Endorsement

Consists of only the endorser’s name/signature Endorsement should match signature on

signature card Check is payable to anyone with the check

Types of Endorsements2. Special Endorsement

Includes the name of the person to whom the check has been transferred

Also called Full Endorsements Include “Pay to the Order of …” before the

signature.

Type of Endorsement3. Restrictive Endorsement

Limits the use of the check to the purpose given in the endorsement (e.g. For deposit only)

If you write “For deposit only” above signature and account number, this endorsement restricts use of the check so it can only be deposited to your account.

If a check with a restrictive endorsement is lost, it cannot be cashed by the finder.

Recording a Deposit Besides the checks, a checkbook also

contains forms on which a depositor writes a record of deposits made and checks written.

Depending on the checkbooks, records are kept on the check stub or check register.

When you make a deposit to your checking account, you should immediately enter the amount on the check stub or in the check register.

Intro to Business

Unit Eight Financial Institutions & Banking Systems

Chapter 27Using Checks & Other Payment Methods

GOALS Demonstrate proper check-writing

procedures

Explain the purpose of a stop-payment order

Name three special types of checks

Describe how payments are made through electronic funds transfer

Elements of a Check Drawer owner of the account and the person who

signs the check.

Payee the person to whom the check is written.

Drawee the bank of other financial institution that

pays the check.

Filling out the Check Stub/Register

Two types of forms are available1. Check stub2. Check register

Check Stub Form attached to the check by a perforated

line Check Register

Separate book, usually the same size as the checkbook

Always fill out the stub or register first

Writing a Check1. Write checks in order by number2. Write the date in the proper space on the

check3. Write the payee’s name on the line following

Pay to the Order of.4. Write the amount of the check in gisures after

the printed dollar sign5. Write the amount of dollars in words on the line

below the payee’s name.6. Write the purpose of the payment on the line

at the bottom of the check7. Sign your check

Forgery Writing another person’s signature on a check

without his or her authority is a crime called forgery.

A check with such a signature is a forged check.

Tips for Good Check Writing

1. Write checks only on the forms provided by your bank.

2. Write checks in ink3. Only write checks if you have money in your

account to cover them.4. Use the current date5. Avoid making checks payable to Cash / Bearer.6. Always fill in the amount7. Void checks on which you make errors.8. Record every payment from your checking

account, whether the payment is by check or EFT.

Stopping Payment on a Check Stop-payment order is a written notice from

the drawer telling the bank not to pay a certain check.

Stop-payment order request the following information:

Date Check number Amount Payee Drawer’s signature

Banks charge a substantial fee for stopping a payment, so use this option wisely

Accepting & Cashing Checks According to law, a check is payable on

demand, at the time the holder of the check presents it for payment at the bank on which it is drawn.

However, a bank may refuse, if the check was dated a while ago.

Some checks carry a printed notation, Please cash within 60 days

Accepting & Cashing Checks Be cautious from whom you accept checks

because a check is valuable only when it is drawn on a bank in which the drawer has money on deposit.

Do not expect strangers to cash checks for you.

Certified Checks a personal check for which a bank has

guaranteed payment. Certification is stamped on the face of the

check and is signed or initialed by a bank officer.

Amount of the check is immediately subtracted from the account

if check is not used, it may be returned to the bank and credited to account

Cashier’s Checks A check that a bank draws on its own in-

house funds. A bank usually keeps funds in an account

of its own on which it writes its own checks.

Cashier’s check costs = amount of the check + service fee

More acceptable than personal checks

Traveler’s Checks Paying traveling expenses with personal

checks may be difficult – accepted throughout the world

Special forms designed for the traveler to use in making payments are called traveler’s checks.

Can be bought at banks, express companies, credit unions, travel bureaus in denominations such as, $10, $20, $50, $100.

Sometimes, a charge of 1% of the value

Best Practices for using Traveler’s Checks

When you buy traveler’s checks: Immediately record the serial number of each

check When you cash each check, record the place and

date you cashed the check Keep this record separate from checks so you have

something to refer to if it is stolen/lost Report lost/stolen checks immediately to the

nearest bank or office Company that issued them will replace them.

Sources of Money Orders Money Order: a form of payment that

orders the issuing agency to pay the amount printed on the form to another party.

1. Bank Money Orders2. Postal Money Orders3. Express Money Orders4. Telegraphic Money Orders

Bank Money Order Bank Money Order

A form sold by a bank stating that money is to be paid to the person or business named on the form

Postal Money Order When you buy a postal money order, the

postal clerk registers by machine the amount in figures and words.

You then fill in the payee’s name, your name and address, and purpose of money order.

Express Money Orders Express money orders are sold by offices

of the American Express Company, Traveler’s Express Company, Federal Express Services Corporation, some travel agencies, and many retail stores.

Telegraphic Money Orders When buying a telegraphic money order,

you buy a message directing a telegraph office to pay a sum of money to a certain person or business.

Telegraphic money orders are used mainly in an emergency when money must be delivered quickly.

Electronic Funds Transfer Individuals can instruct their banks to pay

automatically such monthly bills as utility and telephone charges.

Your employer can also pay your salary through EFT.

Direct deposit has eliminated payroll checks for many companies.

Intro to Business

Unit Eight Financial Institutions & Banking Systems

Chapter 28Managing Your Checking Account

& Other Financial Services

GOALS Explain how checks clear the banking

system

Describe the information on a bank statement

Reconcile a checking account

Discuss factors to consider when selecting a financial institution

Processing Your Checks Checks are available to the depositor as proof

of payment

Clearing is the process where every check is eventually returned to the drawer’s bank to be paid and charged to his or her checking account.

Clearing may be done: within one bank through a clearinghouse through the Federal Reserve System

Local Check Clearing Check clearing may involve one, two, or

several banks and drawers within the same city.

If both drawer and payee have accounts in the same bank, clearing is simple.

The bank subtracts the amount from the drawer’s account and adds that amount to the payee’s account.

When two different banks are involved, clearing is somewhat different.

The Clearinghouse Banks in the same area may be members of

an association that operates a place to clear their checks everyday – clearinghouse

Clearinghouses handle thousands of checks for many banks.

Function of a clearinghouse is simply to redistribute the amounts.

An automated clearinghouse (ACH) transfers funds among banks using electronic payment entries – funds can be easily transferred between accounts in different banks.

Federal Reserve Check Clearing

Federal Reserve System clears checks between banks in different cities. - complex

Just as banks use a clearinghouse and their district Federal Reserve Bank for settlement of net balances, the Federal Reserve uses the Interdistrict Settlement Fund in Washington D.C. to settle net amounts due among banks in the 12 districts.

Interdistrict Settlement Fund = Federal Reserve Clearinghouse.

Settlements are made through ACHs and EFTs.

Your Bank Statement Bank Statement – Report on the status

of your account at regular intervals, usually monthly.

Example

Bank Statement Information Balance at the beginning of month Deposits made Checks paid by the bank Any ATM transactions made Any EFT or special payments made Service charges (including special charges

for services like stopping a check) Any interest earned Balance at the end of the month

Examining Returned Checks Some banks return paid checks to

depositors, while others don’t. If a bank returns a paid check, it cancels

the check – cancelled check Cancelled checks are evidence that

payment was actually received – endorsement proves that payee received the check.

Also, banks keep a photographic record of all checks paid. A copy can be sent to you, but a service fee would apply.

The Reconciliation Process Reconciling the bank balance – bringing

the balances (yours and the bank’s) into agreement.

The statement showing how the two balances were brought into agreement is called the bank reconciliation.

Reason for Recording Differences

Outstanding Checks – checks that had been written but not cashed yet.

Forgotten to record a transaction in your register

Service charge that you have not recorded may be shown

Mailed a deposit to the bank that had not been received and recorded by the bank

Interest from an interest-bearing account may not have been added.

Recorded the amount of a check incorrectly.

Calculating the Adjusted Balance If the balances do not agree, either you or

your bank has made an error. Compare canceled checks Make sure all EFT transactions have been

recorded. Go over calculations on check stubs /

check register Once bank statement is reconciled, correct

any errors on register, and new balance should agree with bank statement.

Selecting a Financial Institution To obtain the best value for your financial

services dollar, do comparison shopping: Services Offered Safety Convenience Fees and Charges Restrictions

Services Offered Select the checking account with the

lowest costs Locate best interest rate on savings Find the lowest interest rate for loans

Do not be attracted just by fancy financial product names or flashy services that might never be needed or used.

Safety Most banks have federal deposit insurance

(FDIC).

Do not assume ALL financial institutions are insured!

Make sure that the institution where you keep your savings is insured.

Convenience Questions to ask yourself…

1. Do you want 24-hour banking services?2. Do you want branch offices near your home or

work?

Note:More convenience will usually mean higher

costs.

Fees and Charges Financial services have costs.

Remember:Low fees for using an ATM or having a

checking account can possibly add up to hundreds of dollars within a few years.

Restrictions Financial services have costs.

Remember:Low fees for using an ATM or having a

checking account can possibly add up to hundreds of dollars within a few years.