Chapter 4 The Banking Services of Financial Institutions

1. Chapter 4The Banking Services of Financial Institutions 4-1

2. Learning Objectives - Chapter 4 • Analyze factors that affect selection and use of financial services. • Compare the types of financial institutions. • Compare the costs and benefits of various savings plans. • Identify the factors used to evaluate different savings plans. • Compare the costs and benefits of different types of chequing accounts. 4-2

3. Learning Objective # 1Analyze factors that affect selection and use of financial services. 4-3

4. 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

5. 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

6. 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

7. 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

8. 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. www.nbc.ca 4-8

9. 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

10. 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

11. Learning Objective # 2Compare the types of financial institutions. 4-11

12. 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

13. 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

14. Comparing Financial Institutions • Services offered • Rates • Fees & Charges • Financial advice • Safety (deposit insurance) • Convenience and location • Online services and special programs 4-14

15. Learning Objective # 3Compare the costs and benefits of various savings plans. 4-15

16. 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

17. Learning Objective # 4Identify the factors used to evaluate different savings plans. 4-17

18. 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 EAR = (1 +km)m – 1 m = number of periods in year km = rate of return for one period 4-18

19. 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

20. Learning Objective # 5Compare the costs and benefits of different types of chequing accounts. 4-20

21. 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

22. 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

23. 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

24. 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

25. 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