CHAPTER4 Banking Services:Savings and Payment Services Overdraft fees now average $35 per transaction. That was $31.5 billion in 2012, up from $30.8 billion in 2011. -- abcNews, Center for Responsible Lending http://abcnews.go.com/Business/banks-raking-profits-overdraft-fees/story?id=17408954&singlePage=true
Types of Financial Institutions • Deposit type financial institutions • Commercial banks are corporations that offer a full range of services including checking, savings, and lending • Insured by FDIC • Credit unions are user-owned and nonprofit • Hence their fees are usually lower than banks and the rates they pay are usually higher than banks • Insured by NCUA/NCUSIF Discussion: Are there any significant differences between banks and credit unions? Is your money safe?
Types of Financial Institutions (continued) • Non-deposit type financial institutions • Investment companies offer money market mutual funds. You can write checks on your account • (More about money markets when we get to investments) • Post office, convenience stores offer money orders • Check-cashing outlets charge 1% to 3% or more to cash a check • A bank or credit union will cash your checks for free • Pawnshops make loans on possessions (60%?!) • Loan-Until-Payday companies (244%?! 400%!) Where do you see the most check-cashing outlets, pawnshops, loan-until-payday companies, etc.?
Which type of financial institution do you use? • Commercial bank • Credit union • Other (check cashing, post office, etc.) • I do not have any money so I do not need one! Discussion: Why and how do people choose one financial institution over another?
On-line banking • Banking through the telephone, personal computer, and other on-line services • Access 24 hours a day, 7 days a week • ATM is your teller if you need cash or want to deposit money • Privacy and security are concerns • Do you allow your browser to store your password? Do you have a strong password? Why are financial institutions pushing these services? Some banks (example: HSBC) are attracting Internet-only customers with very high yields on their savings accounts. What is their motivation to do this?
Types of Financial Accounts • Savings accounts • Savings accounts (banks, a.k.a. passbook saving accounts) • Share accounts (credit unions, a.k.a. savings accounts) • Certificates of Deposit (CDs)– Shop around! • Payment accounts • Checking accounts (banks) • Share draft accounts (credit unions, a.k.a. checking) • NOW accounts (Negotiable Order of Withdrawal) • Checking account that earns interest (negligible) • Overdraft Protection? • For checks? Yes, get it. Link it to your savings account • For debit cards? No way! Must now “opt-in” • Careful – compare costs. How much is it?
Types of Financial Accounts (continued) • Money market • Money market account (bank or credit union) • Insured! • Money market mutual fund (mutual fund company) • Not Insured! (but still very, very safe) • Trust accounts – FBO (usually for minors or the aged) • Asset Management Accounts – Through brokerages • Very high class! Usually around $100+ per year • Club accounts • “Christmas Club” • “Vacation Club” • Tanda? – Cundina? – Paluwagan?
Selecting Payment Methods • The number of electronic payments now far exceeds the number of paper check payments • Many Millenials don’t even have (or want) a checkbook • Types of checking accounts • Regular • Usually have a monthly service charge • Activity account • Charge a fee for each check written • Some have both types of fees! • No-fee checking accounts have been the norm but that is currently changing • Banks need to make up for the fees they are losing because of the recent changes in the banking laws
Other Payment Methods • Certified check • Personal check with guaranteed payment • Cashier’s check • Check 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 check • Each check must be signed twice • Electronic traveler’s checks – prepaid travel card with ability to get local currency at an ATM • Much less popular than they once were
Other Payment Methods (continued) • Electronic cash • ATM Point-of-sale transactions • Stored-value cards • For long distance, tolls, library fees • Smart cards – not linked to your bank account • Were supposed to replace cash • Never really caught on • Gift cards • Internet payments – PayPal, Yahoo!, etc. • Credit cards
Automated Teller Machines • A computer terminal that allows customers to conduct banking transactions • Debit card or cash card activates transactions • Linked to a bank account – Requires a PIN • Liability if debit card is lost or stolen • To reduce ATM fees you can... • Compare ATM fees before opening an account • Use your own bank’s ATM when possible • Withdraw larger cash amounts as needed • Use personal checks, traveler’s checks, credit cards, and pre-paid cash cards when traveling
Evaluating Savings Plans • Rate of return or yield • Percentage increase in value due to interest • Compounding - interest on interest • Annually, semiannually, quarterly, daily • Annual Percentage Yield (APY) • After-Tax Rate of Return • (1 – Marginal-Tax-Rate) x Rate-of-Return • (1 – 25%) x 4% = 0.75 x .04 = 0.03 = 3% • So even if you are earning 4%, after you pay the taxes on the interest you earned, you are actually earning only 3%
What is “Truth in Savings?” • Requires disclosure of... • Fees on deposit accounts • The interest rate (a.k.a. the nominal rate) • The Annual Percentage Yield (APY) • Establishes rules for advertising accounts • Sets formulas for computing the APY • Interest must be compounded on the full principal amount in the account each day • The bank can put a hold on your money but it still must pay you any interest you deserve
Check Reconciliation • More than half Americans do not reconcile their checkbook balances • Check Register • Keep it current! • Write every transaction down – Immediately! • Keep an electronic register and a written one • Bank Statement • Check reconciliation forms • Check register spreadsheet • Quicken, etc.
Okay, ‘fess up! Do you reconcile your checking account balance? • I balance it to the penny • I have a pretty good idea of the accuracy • Nope – I never reconcile it • As long as there are more checks in my checkbook, what do I have to worry about?
Check Reconciliation (continued) • When you get the monthly bank statement… • Record cleared checks • Identify outstanding checks • Record deposits confirmed • Identify deposits in transit • Look for transactions that were left out of the check register • Reconcile! Let’s try an example…