Ch. 4 - The Banking Services of Financial Institutions

To reduce ATM fees:

Compare ATM fees at different financial instututions before opening account Use your banks own ATM to avoid surcharges Consider purchasing monthly service package that includes ATM activity Withdraw larger cash amounts to avoid fees on smaller transactions Get cash back at grocery store while paying with debit card Consider using personal cheques, travellers cheques, credit cards, and prepaid cash cards

Deposit-type institutions

Many years, government policies prohibited cross-ownership and foreign control of the 4 major types of businesses in financial services. Referred to as "four pillars" separated banks, trust companies, insurance companies, and investment dealers, where rules were established to protect their core business. 1992, passed legislation permitting banks, trust and loan companies, and insurance companies to compete more directly with one another

Canada savings bond

Sold only once a year, for the 6-month period starting in October until following April 1. Fixed interest for the 1st year, subject to a guaranteed minimum, rates can be adjusted according to market conditions in later years. 2 types available: • Regular interest bond - bond pays regular annual interest by cheque or direct deposit to an investor's account on November 1 of each year • Compound interest bond - bond reinvests earned interest automatically until redemption or maturity.

opportunity cost of financial services

The money you save by shopping around for a low-cost chequing account must be balanced against the value of the time you spend gathering information. Other common trade-offs: Higher returns of longterm savings and investment plans may be achieved at the cost of low liquidity, the inability to obtain your money quickly The convenience of 24-hour ATM or bank branch office near your home The "no fee" chequing account that requires non-interest-bearing $1,000 minimum balance means lost interest of nearly $220 at 2% compounded over 10 years

When interest rates are rising:

Use long-term loans to take advantage of current low rates Select short-term savings instruments to take advantage of higher rates when they mature

When interest rates are falling:

Use short-term loans to take advantage of lower rates when you refinance the loans Select long-term savings instruments to "lock in" earnings at current high rates

Basic concerns of a financial services customer are simple:

Where can I get the best return on my savings? How can I minimize the cost of chequing and payments services and still have the convenience of not spending a lot of time by doing so? Will I be able to borrow money when I need it?

Bank of Canada has 4 main areas of responsibility

(1) monetary policy, (2) currency, (3) the financial system, and (4) funds management

payment services

- Ability to transfer money to other parties is necessary part of daily business activities - Chequing accounts and other payment methods, demand deposits

Borrowing

- Credit alternatives range from short term accounts (credit cards and cash loans) to long term borrowing (home mortgage)

savings

- Safe storage of funds for future use is a basic need for everyone - Time deposits - money in savings accounts and investment certificates - Selection of savings plan is commonly based on interest rate earned, liquidity, safety and convenience

ATM

Automated Teller Machines (ATM) - convenience can be expensive.

Non-deposit institutions

Financial services are also available from institutions such as life insurance companies, investment companies, mortgage and loan companies, finance and leasing companies, pawnshops, and cheque-cashing outlets.

Interest earning checking accounts

Interest-earning accounts, usually very low interest rate

Common mistakes made when managing current cash needs include:

Overspending as a result of impulse buying and using credit cards. Having insufficient liquid assets (cash, chequing account) 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 to achieve long-term goals.

Trust

a legal agreement that provides for the management and control of assets by one party for the benefit of another. o Commonly created through a commercial bank or lawyer o Parents who want to set aside certain funds for children's education - trust or an Registered Education Savings Plan (RESP) o Investment and money in trust are managed by a bank

overdraft protection

automatic loan made to chequing account customers for cheques written in excess of the available balance. Convenient but costly.

what influence financial services?

changing interest rates, rising consumer prices and other economic factors

activity accounts

charge a fee for each cheque written or electronic payment processed and sometimes a fee for each deposit, in addition to monthly service charge. Do not have to keep a minimum balance.

Rate of return

earnings on savings can be measured by the rate of return, or yield: the percentage of increase in the value of your savings from earned interest. Compounding - yield on your savings will be greater than the stated interest rate. More frequent the compounding, the higher your rate of return will be. Effective Annual Rate (EAR) EAR=[1+k/m]^m-1 m = # of compounding periods in a year k = rate of return quoted for a year

time deposits

guarantee a rate of interest for a specified term. The trade-off is that your money becomes less accessible for a time. (Contrary to savings account)

automatic payments

many utility companies, lenders and other buisnesses allow customers to use an automatic payment system, with bills paid through direct withdrawl from a bank account. - Stagger your bill payments and savings plans to coincide to when your paycheques are deposited.

regular chequing accounts

monthly service charge that you may avoid by keeping a minimum balance in the account.

restrictions

most common limitation on chequing accounts is the amount you must keep on deposit to earn interest or avoid a service charge.

safety

most savings plans are insured by agencies affiliated with the federal government. Protection prevents loss of money due to the failure of the insured institution.

Investment companies

o Aka mutual funds o A common service - money market fund - combination savings-investment plan in which the investment company uses your money to purchase a variety of short-term financial instruments. o Earning are based on interest the investment company receives

Pawnshops

o Cash converters - make loans based on the value of tangible possessions, such as jewellery or other valuable items. o Many low and moderate-income families use these organizations to obtain cash loans quickly.

Credit unions/caisses popularies

o Credit union (or caisse populaire in Quebec) - user-owned, non-profit, co-operative financial institution o Lower fees for chequing accounts, lower loan rates, and higher levels of user satisfaction for credit unions compared with other financial institutions.

Finance and leasing companies

o Extend loans and leases to both individuals and businesses.

Life insurance companies

o Main purpose: provide financial security for dependants o Many also contain savings and investment features.

Cheque-cashing outlets

o Most financial institutions will not cash a cheque unless the person has an account. o Cheque-cashing outlets (CCOs) charge anywhere from 1-20% of face value of a cheque, average cost is between 2-3%.

Trust companies

o Offer a broad range of financial services similar to those provided by banks. They are the only corporations allowed to act as a trustee in charge of corporate or individual property, stocks and bonds. Most trust companies owned by banks, except large independents (Sun Life Fianncial Trust, Manulife)

Chartered banks

o Operating under the provisions of the Bank Act, the principal activity of the banks is to lend funds to businesses and consumers at interest rates that are higher than those banks pay on deposits and other borrowings. o Schedule I Banks - full-service domestic banks (not foreign subsidiaries), including the Big Six banks (RBC, CIBC, BMO, Scotiabank, TD, National Bank of Canada), smaller Canadian-owned banks, and other non-bank financial institutions. o Schedule II Banks - Subsidiaries of foreign banks in Canada which have restrictions on asset growth as well as on lending activities that are a function of their local capital base rather than of the parent bank. Tend to focus on commercial corporate loans rather than retail banking services. HSBC, State Bank of India, etc. o Schedule III Banks - branches of foreign institutions that have been authorized under the Bank Act to do banking business in Canada, subject to certain restrictions.

Mortgage and loan companies

o Real estate mortgage loans as well as financing opportunities o Loans provided have short and intermediate terms with higher rates than most other lenders charge.

certified cheque

personal cheque with guaranteed payment.

inflation

rate of return you earn on your savings should be compared with the inflation rate.

tax considerations

taxes reduce interest earned on savings.

GICs

term deposits with a longer term, ranging from 1-5 years. Minimum deposit is often required. Interest can be fixed rate, variable or indexed-linked (based on formula linked to stock market returns).

liquidity

the ease with which you can access cash or convert investment to cash with a minimal loss of principal.

regular savings account

traditionally called passbook accounts, usually involve a low or no minimum balance. Regular usually allows you to withdraw money as needed, but service fees apply. Time deposits may require a waiting period to obtain your funds.

interest-earned chequing accounts

usually require minimum balance, account goes below, you may not earn interest and likely incur a service charge.

direct deposit

workers receive only a pay stub on payday. Earnings automatically deposited into chequing or savings account. Process saves time, effort and money. Government agencies also using it to reduce costs and fraud.

2 sources of quick cash

-liquidate savings -borrow A savings account, cashable Guaranteed Investment Certificate, mutual fund, ETF, or other investment may be raided when you need funds.

Methods of payment:

-point of sale transactions -stored value cards -smart cards -software-based payment systems

Banks and other financial institutions offer services that fall into 4 main categories

-savings -payment services -borrowing -other financial services