Chapter 4 The Banking Services of Financial Institutions

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Chapter 4The Banking Services of Financial
Institutions
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Kapoor Dlabay Hughes Ahmad
Prepared by Cyndi Hornby, Fanshawe College
? 2009 McGraw-Hill Ryerson Ltd.
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Learning Objectives - Chapter 4
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1. Analyze factors that affect selection and use of
   financial services.
2. Compare the types of financial institutions.
3. Compare the costs and benefits of various savings
   plans.
4. Identify the factors used to evaluate different
   savings plans.
5. Compare the costs and benefits of different types
   of chequing accounts.

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Learning Objective 1Analyze factors that
affect selection and use of financial services.
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4
A Strategy for Managing Cash
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• 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.

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Types of Financial Services
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• Savings.
• Time deposits in savings and investment
  certificates.
• Payment services.
• Chequing 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.

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Electronic Banking Services
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• Direct deposit of pay cheques and other regular
  income.
• Automatic payments.
• Obtain cash.
• Check account balances.
• Transfer funds.
• Point-of-sale payments.
• Web cyberbanking.

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Automated Teller Machines
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• 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 banks ATM when possible.
• Purchase monthly service package the includes ATM
  transactions.
• Withdraw larger cash amounts as needed.
• Use personal cheques, travelers cheques, credit
  cards, and pre-paid cash cards when traveling.

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Methods of Payments
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• 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

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Opportunity Costs of Financial Services
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• 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
  1000 non-interest-bearing minimum balance means
  lost interest of nearly 220 at 2 percent
  compounded over 10 years.

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Financial Services and Economic Conditions
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• 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.

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Learning Objective 2Compare the types of
financial institutions.
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Types of Financial Institutions
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• Deposit type institutions
• Chartered Banks offer a full range of financial
  services to individuals, businesses and
  government agencies
• Schedule I Banks full domestic service banks
• Schedule II Banks subsidiaries of foreign banks
  in Canada
• Schedule III Banks branches of foreign
  institutions

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Types of Financial Institutions
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• Deposit type institutions
• 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

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Types of Financial Institutions
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• 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.
• Banking via phone and on-line with most financial
  institutions.

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

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Learning Objective 3Compare the costs and
benefits of various savings plans.
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Types of Savings Plans
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• Regular savings accounts.
• Low or no minimum balance
• Ease of withdrawal
• Insured by financial institution
• Low rate of return
• Term Deposits and Guaranteed Investment
  Certificates (GICs)
• Guaranteed rate of return
• Insured
• Possible penalty for early withdrawal
• Minimum deposit required

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Types of Savings Plans
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• Interest earning chequing accounts.
• Chequing privileges
• Interest earned
• Insured
• Possible service charge for going below minimum
  balance
• Cost for printing cheques and other fees
• Money Market Accounts
• Favourable rate of return
• Allow some cheque writing
• Higher minimum balance required
• No interest or service charge of below

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Types of Savings Plans
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• Money Market Funds
• Favourable rate of return
• Minimum balance required
• Not insured
• Canada Savings Bonds
• Varying rate of return
• Regular or Compound interest
• Government guaranteed
• Low minimum deposit
• No interest paid if redeemed before three months

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Learning Objective 4Identify the factors used
to evaluate different savings plans.
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Evaluating Savings Plans
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• 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
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Evaluating Savings Plans
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• Inflation
• Compare return with inflation rate
• Tax considerations
• Taxes reduce interest earned
• Liquidity
• Ease with which you can convert to cash with a
  minimal loss of principal

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Evaluating Savings Plans
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• Safety
• Canadian Deposit Insurance Corporation (CDIC)
  insures up to a maximum 100,000 per person per
  financial institution
• Restrictions and Fees
• Delay between when interest earned and added to
  your account
• Transaction fees for each deposit or withdrawal
• Interest paid only with minimum balance

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Learning Objective 5Compare the costs and
benefits of different types of chequing accounts.
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Selecting Payment Methods
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• Types of chequing accounts include...
• Regular chequing accounts
• Usually have a monthly service charge that you
  can avoid with a minimum balance.
• Activity account.
• Charge a fee for each cheque written.
• Interest-Earning Chequing accounts
• Require minimum balance

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Evaluating Chequing Accounts
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• 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

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Other Payment Methods
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• Certified cheque
• Personal cheque with guaranteed payment.
• Cashiers 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.
• Travelers cheque
• Sign each cheque twice.
• Electronic travelers cheques - prepaid travel
  card with ability to get local currency at an ATM.

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Summary of Learning Objectives
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• Analyze factors that affect selection and use of
  financial services
• Financial products (savings plans, chequing
  accounts, loans and trust services) are used for
  managing daily financial activities
• Technology, opportunity costs and economic
  conditions affect the selection and use of
  financial services

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Summary of Learning Objectives
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• Compare the types of financial institutions
• Chartered banks, trust companies, credit unions
  and caisses populaires
• Life insurance companies, investment companies,
  mortgage and loan companies
• Pawnshops and cash chequing outlets
• Should be compared on the basis of
• Services offered
• Rates and fees
• Safety
• Convenience
• Special programs available to consumers

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Summary of Learning Objectives
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• Compare the costs and benefits of various savings
  plans
• Regular savings accounts
• Terms deposits
• Guaranteed Investment Certificates (GIC)
• Interest earning chequing account
• Canada Savings Bonds

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Summary of Learning Objectives
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• Identify the factors used to evaluate different
  savings plans
• Rate of return
• Inflation
• Tax considerations
• Liquidity
• Safety
• Restrictions and fees

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Summary of Learning Objectives
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• Compare the costs and benefits of different types
  of chequing accounts
• Regular chequing accounts, activity accounts and
  interest-earning chequing accounts
• Compared with regard to
• Restrictions (such as minimum balances)
• Fees and charges
• Interest
• Special services

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Chapter 4 - Appendix
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• 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

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Chapter 4 - Appendix
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• 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