Chapter 4 - The Banking Services of Financial Institutions

Types of Financial Services

- Savings - Payment services - Borrowing - credit - Other financial services: insurance, investment, real estate purchases, tax assistance, and financial planning, trust

Interest Earning Chequing Accounts

- chequing privileges - interest earned - insured - possible service charge for going below minimum balance - cost for printing cheques and other fees

Electronic Banking Services

- direct deposit of pay cheques - automatic payments - obtain cash - check account balances - transfer funds - online banking

Term Deposits and GICs

- guaranteed rate of return but money becomes less accessible over time - insured - possible penalty for early withdrawal - minimum deposit required GIC's are similar to term deposits but have a longer term (3-5 years)

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 can mean lost interest

Regular Savings Account (Passbook)

- low/no minimum balance - ease of withdrawal - insured by financial institution - low rate of return - no guaranteed ROR

Common mistakes in managing cash

- overspending due to impulse buying and using credit cards - not having enough liquid assets to pay current bills - using savings or borrowing money to pay for current expenses - failing to put unneeded funds in an interest-earning savings account or investment plan

High cost financial services include ...

- pawn shops - payday loans (cash advances) - rent-to-own centres - refund anticipation loans (on tax refunds)

Concerns of online banking

- potential privacy and security violations - ATM fees can be expensive - Difficulty depositing cheques and cash

Factors used to evaluate different savings plans

- rate of return - inflation - tax considerations - liquidity - safety - restrictions and fees

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

Financial institutions should be compared on the basis of

- services offered - rates and fees - safety (knowing your money will be there when you need it) - convenience - special programs available to customers

Traveler's cheque

- sign each cheque twice - electronic traveler's cheques - prepaid travel card with ability to get local currency at an ATM

Benefits of online banking

- time and money savings - convenience for transactions and comparing rates - no paper trail for identity thieves

When interest rates are rising, what should you do with your loans and savings?

- use long-term loans to take advantage of the current low interest rates - short-term savings take advantage of higher rates when they mature

When interest rates are falling, what should you do with your loans and savings?

- use short-term loans, in the hopes that your next loan will have a lower interest rate - lock in earnings of long-term savings to take advantage of the current high rates

Canada Savings Bonds

- varying rate of return - regular or compound interest - government guaranteed - low minimum deposit - no interest paid if redeemed before 3 months

Trust

a legal agreement that provides for the management and control of assets by one party for the benefit of another

Effective Annual Rate (EAR)

calculates the effective return taking compound into effect EAR = (1+km)m -1 m = number of periods in a year km = rate of return for one period

Most common payment choices

cash, cheque, credit card, or debit card

Cashier's cheque

cheque of a financial institution you get by paying the face amount plus a fee

Methods of Payments - point-of-sale transactions

debit cards routinely accepted in most retail and restaurants PIN required and money automatically debited, reducing available funds

Liquidity

ease with which you can convert to cash with a minimal loss of principal Consider the degree of liquidity you desire in relation to savings goals

Trust Companies

like chartered banks, they also offer a broad range of services as well as act as trustees

Chartered banks - Schedule 1 banks - Schedule 2 banks - Schedule 3 banks

offer a full range of financial services to individuals, businesses and government agencies - Schedule 1: full domestic service banks (Big 6 Banks) - Schedule 2: subsidiaries of foreign banks in Canada; tend to focus on corporate loans - Schedule 3: branches of foreign banks ; specialize in niche financing

Rate of return (yield)

percentage increase in value due to interest - compounding - interest on interest

Certified Cheque

personal cheque with guaranteed payment

Methods of Payments - stored- value cards

pre-paid for phone services, transit & library fees Smart cards have a microchip for prepaid goods and services

Money order

purchase at a financial institution, post office, store

Savings - time deposits

secure saving of funds for future use

Credit Unions

user owned and non-profit financial institutions offering a range of services