Chapter 12

Chapter 12
Banking Procedures and

Services
© 2010 Pearson Education, Inc.

All rights reserved
Learning Objectives
• Explain the difference between different types of

financial institutions
• Learn the basics of having a checking account,
including how to balance an account
• Describe other available banking services
• Describe the two major federal insurers
• Explain the function and goals of the Federal
Reserve
© 2010 Pearson Education, Inc. All rights reserved 0-2

Banks and Financial Institutions
• Banks and other financial institutions offer

services such as providing personal loans and
accepting deposits
• Most offer accounts that allow you to draft
payments
• There are two major types of financial institutions:
– Depository institutions
– Nondepository institutions

Depository Institutions
• Depository • Depository institutions take in

institutions are
financial institutions
and secure people’s money
that provide • This money is loaned to people
traditional checking and businesses in the community
and savings account
for individuals and • Types of depository institutions
business. They also include:
provide loans – commercial banks
– savings banks
– credit unions

Depository Institutions
• Depository institutions generally pay interest

on the deposits people leave with them
• The deposits are used to make loans, on
which they charge an even higher rate of
interest
• They also make money by charging various
fees for services, such as overdraft protection

Nondepository Institutions
• Nondepository • Nondepository institutions

institutions consist
of institutions that
include:
provide certain – insurance companies
financial services – finance companies
but do not accept
– securities firms
traditional deposits
– investment companies

Choosing a Bank
• Automatic teller • Depository institutions can differ on

machines (ATMs) fees charge, interest rates paid on
are machines where
deposits, and access to ATMs and
you take cash out
from your bank
branches
account. • There can be significant fees charged
from ATMs that are not within your
bank’s network
• Some internet banks pay a higher
deposit rate, but they also provide
limited access

Check Your Financial IQ
• What are two types of financial institutions?

• Depository and nondepository institutions

are financial institutions

Banking Basics: Checking
Accounts
• One of the more widely used banking

services is the checking account
• It is also a service that can lead to trouble if
not managed carefully

How Checking Accounts Work
• When you write a check for

• Checking account is an
someone, that person “cashes” the
account at a bank into check at your bank
which you deposit
money and withdraw • The bank takes the money out of
money by writing checks your account and gives it to the
or using a debit card person
• Check is a written order • This process often happens
from you to your bank electronically
instructing it to pay • See figure 12.1 to see a sample
money from your check and an explanation of its
account to another party parts

Figure 12.1

How Checking Accounts Work
• We open checking accounts because it allows

us to have an accurate payment record
• It also allows us to carry less cash
• Checks also make it safer to send payment via
the mail
• Checks can only be cashed by the person it is
written out to

Math for Personal Finance
• Jim’s checking account balance was $541.39

at the beginning of the month. He deposited
a $50 check he earned form mowing lawn
and wrote a check for $28.32. His monthly
service fee was $8.
• What is Jim’s new account balance?

• Solution: $541.39 + $50 - $28.32 - $8 =

$555.07

NOW Accounts
• Negotiable order of • Money kept in ordinary

withdrawal (NOW)
accounts function much
checking accounts do not
like checking accounts usually earn interest
except they pay a small • You can earn interest on
amount of interest on
money in the account
NOW accounts
• NOW accounts require you to
maintain a minimum balance
in order to earn interest

Debit Cards
• Debit card enables you • Many banks provide debit cards

to withdraw cash from
your account at ATMs,
to their account holders
or to pay directly for • A debit card looks like a credit
goods or services at card, but works differently
businesses
• There is no credit involved
• The amount of money is
withdrawn immediately from
your account

Debit Cards
• Debit cards are convenient but can

• Personal
identification make it easy to spend money
number (PIN) are • Record debit card withdrawals and
usually four-digit purchases in your check register
numbers that you
• Debit cards require you to use a
need to memorize in
order to be able to use personal identification number
your debit card (PIN)
• Be careful with your PIN. No one
should know it but you.

• Tucker used his debit card to withdraw $40

cash from his account. However, he used an
out-of=network ATM that charged him
$2.50, and his own bank charged another $2
for the out-of-network withdrawal.
• How much will his account be charged in
total?

• Solution: That was an expensive withdrawal

for Tucker. His account will be reduced by
$40 + $2.50 + $2 = $44.50

Using Your Checking Account
• Check register is a • The amount you open an

small ledger the bank
will provide you for
account with is your balance
keeping track of your • Record that amount in your
account balance check register
• Record all checks and debit card
purchases/withdrawals in the
register.

Using Your Checking Accounts
• Keeping an accurate balance is essential

• Some checking accounts have overdraft
protection
• The bank will cash up to a certain amount even
if you do not have money in your account
• You will have to pay back the bank and pay a
fee

Using Your Checking Accounts
• Some checking accounts do not have overdraft

protection
• If you overdraw such an account, the bank will
not cash any checks
• They will charge you a fee for overdrawing
your account
• Most businesses will also charge you a fee for
writing them a bad check

Balancing Your Account
• It is possible for errors—yours or the bank’s—

to occur.
• You should regularly compare your records to
the bank’s. (see figure 12.2)
• At the end of each month the bank will send
you a bank statement
• This lists the bank’s records of all the deposits
and checks written against your account

Figure 12.2

• Mary Beth’s checking account balance on

her bank statement shows $184.32.
However, she wrote checks for $41.78 and
$12.10 that have not cleared the bank yet.
• How much do Mary Beth’s outstanding
checks total?

• Solution: Outstanding checks are checks that

have not cleared the bank so the total is
$41.78 +$12.10 = $53.88

• Why are checking accounts useful?

• They enable you to carry less cash, keep

records, and mail payments securely

Other Banking Services
• Banks offer a variety of different services

besides checking and savings accounts
• A few of them are discussed on the
following slides
• Become familiar with these services as they
can help with your financial planning

Safety Deposit Box
• Safety deposit boxes • Safety deposit boxes are

are small containers
located inside the
usually available for rent at
bank vault and are most banks
used to store valuable • Safety deposit boxes
documents
usually contain wills and
small objects such as
jewelry, rare coins, and
legal documents

Cashier’s Checks, Money Orders,
and Travelers Checks
• Cashier’s check is a • Banks are also a source of

type of check that is
written to a specific
cashier’s checks
payee but charged • When you buys a cashier’s
against the bank check, the bank takes the
instead of your account
money out of your account
immediately
• These types of checks are
accepted in situations when a
personal check is not

• Money orders are • Money orders function similar to

purchased for cash so cashier’s checks
that the recipient can
trust that they are • The US Postal Service sells
worth what they say money orders for a fee
they are • Money orders are also common
when you buys something online.
• The seller does not have to wait
for your check to clear when
using a money order.

• Travelers checks are • People pay for travelers checks

checks written by a
in advance
large financial
institution with no • The recipient can be confident
payee specified that the check will be cashed
• Travelers checks are accepted
around the world
• Travelers who lost travelers
checks can usually replace them

Arrangements for Credit Payments
• Bank drafts occur • Bank drafts are used to make

when you authorize
car and house payments, and
someone to take money
out of your bank to pay utility bills
account automatically to • People use bank drafts to
satisfy some financial
contribute to retirement
obligation
accounts and other investments
• Bank drafts help you pay off
borrowed money in a timely
manner

Arrangements for Credit Payment
• Electronic funds • Bank drafts are an example of

transfer is whenever
electronic funds transfer
you authorize someone
to access your bank • A bank draft authorization will set
account for payment a specific date on which the money
or for deposit is taken from your account
• With bank drafts, you do not have
to write a check every month
• Make sure to record all bank drafts
and transfers in your check register

Other Online Services
• Most banks now offer a variety of online

services, such as:
– having payments drafted directly out of your account
– utilize online bill payment services
– transfer funds between checking and savings
accounts
– make loan applications
– check your bank statements

• Besides checking account, what services are

typically offered by banks?

• Services include safety deposit boxes,

cashier’s checks, money orders, and travelers
checks

Deposit Insurance
• One of the reasons to put • The major federal

money in the bank is to keep insurers are:
it safe • Federal Deposit
• If the institution went Insurance Corporation
bankrupt, you would want (FDIC)
your money to be protected
• National Credit Union
• Most financial institutions
Savings Insurance
have deposit insurance on
Fund (NCUSIF)
the first $250,000 you have
on deposit.

FDIC
• The federal government created the FDIC in

1933 during the Great Depression
• The bank failures caused people to take their
money out of even healthy institutions
• This reaction hurt the banks and reduced the
amount of money available for borrowing
• The government needed a way to restore faith
in the banking system

FDIC
• Saving money is critical to economic growth

• If there is no money deposited in the banks,
businesses cannot borrow
• Currently, the FDIC provides deposit insurance on
the first $250,000 of deposits at insured institutions
• FDIC insurance covers checking accounts, savings
accounts, NOW accounts, and certificates of
deposit

NCUSIF
• The National Credit Union

• Credit unions
functions similarly to Association (NCUA)
a bank, but unlike a supervises credit unions
bank, a credit union
has nonprofit status • It provides deposit insurance
and is owned by its with the same limits as FDIC
members
insured deposits
• This program is also backed by
the federal government

• Why is it important to give people

confidence in the safety of their deposits?

• If people lose confidence in the safety of

their deposits, they may withdraw money in
panic and that can damage even healthy
banks

The Federal Reserve and Banking
System
• The bank is part of a larger system that plays

a central role in the nation’s economy
• At the heart of that banking system is the
Federal Reserve System
• The Fed, as it is known, helps regulate our
banking system and our whole economy

Multiple Roles
• The Federal Reserve Act of 1913 created

• Federal Reserve the Federal Reserve System
System serves as
the central bank • The Fed regulates banks and carries out
of the United the nation’s economic policies
States • The Fed’s major economic goals are to
create ongoing economic growth,
encourage full employment, and promote
price stability
• The Fed uses monetary policy in order to
achieve these goals

Price Stability
• Price level stability • The main goal of Fed policy is

means making sure that price level stability
we don’t have inflation • Inflation means the prices of
(or deflation)
• Inflation is defined as a
goods and services are going up
sustained increase in the • Inflation is considered
general level of prices problematic to the government
and the Fed because it harms
businesses and individuals in
our economy

Monetary Policy
• Monetary policy
• The Fed uses monetary policy as
involves the raising or its primary tool to fight inflation
lowering of the money and promote a healthy economy
supply to achieve some
• The money we currently use in
goal
• Fiat money has value the United States is known as
not because the coins fiat money
and bills have some • With fiat money, a five-dollar
value in their own right,
but because the
bill is worth five dollars because
government orders that it the government says it is
be accepted as payment

Monetary Policy
• The government must control how much of

that paper and coin is circulating in the
economy
• The United States Treasury is in charge of
printing money and minting coins
• The Fed is the agency in charge of
determining how much money is in
circulation

Monetary Policy
• Physical money in circulation is the most visible

part of the money supply
• There is a lot of electronic money that we never see
• As the economy grows and more people need
money to make purchases, the Fed expands the
money supply
• This includes more electronic money, paper
money, and coins (see figure 12.3)

Figure 12.3

Monetary Policy
• The Fed uses monetary policy to change interest

rates and impact buying behavior
• If the Fed wants to encourage people to spend
more money, it increases the money supply
• When more money is available, it drives
interest rates down and encourages spending
• When the Fed reduces the money supply,
interest rates go up

Monetary Policy
• If the Fed shrinks the money supply, people will

compete for an item (money) that’s in limited
supply
• The price of that money (interest rates) will go up
• If the Fed is concerned about inflation, it will
shrink the money supply
• This will drive up the price of money and
discourage spending, which should slow inflation

Monetary Policy
• A Discount rate • The Fed uses the money supply to

occurs when the
Fed changes the
impact interest rates
interest rate it • Banks use the option of
charges to the borrowing money from the Fed
banks when it
loans them money
only on occasion
• Either of these actions are
designed to slow the economy or
stimulate the economy

Monetary Policy
• The Fed has to maintain a balance

• It wants enough money in the economy to
encourage economic growth, but not too
much because to cause inflation
• Keep the Fed’s overall goals in mind: stable
prices, economic growth, and full
employment

• What is the main tool the Fed uses to

influence the economy?

• The Fed changes the money supply

Summary
• Banks and other financial institutions offer

individual services such as:
– making personal loans
– accepting deposits
– providing accounts that allow you to draft payments
• There are two types of institutions:
– Depository institutions
– Nondepository institutions

Summary
• One of the most widely used banking services is

the checking account
• Checking accounts allow us to have an accurate
record of our payments and to carry less check
• Many banks provide debit cards to their
checking account holders
• A debit card enables you to withdraw cash from
your checking account

Summary
• Other services provided by banking

institutions are the following:
– Safety deposit boxes
– Cashier’s checks
– Money orders
– Travelers checks
• Banks also offer services for credit payment

Summary
• The FDIC and NCUSIF are two major

insurers for most financial institutions
• Most financial institutions have deposit
insurance to protect your money up to some
maximum amount

Summary
• The Fed is the heart of the banking system and

regulates banking and the whole economy
• The Fed’s major economic goals are to:
– create ongoing economic growth
– encourage full employment
– promote price stability
• The Fed uses monetary policy to help
accomplish these goals

Key Terms and Vocabulary
• Automatic Teller Machine (ATM) • Fiat money

• Bank draft • Inflation
• Cashier’s check • Monetary policy
• Check • Money orders
• Check register • National Credit Union Savings
• Checking account Insurance Fund (NCUSIF)
• Credit union • Negotiable order of withdrawal
• (NOW) accounts
Debit card
• • Nondepository institutions
Depository institutions
• • Personal identification number
Discount rate (PIN)
• Electronic funds transfer • Price level stability
• Federal Deposit Insurance •
Corporation( FDIC) Safety deposit boxes
• Travelers checks
• Federal Reserve System

Websites
• www.bls.gov
• Dir.yahoo.com/
• www.fdic.gov
• www.federalreserveeducation.org
• www.federalreserve.gov

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Chapter 12

Banking Procedures and

© 2010 Pearson Education, Inc.

• Explain the difference between different types of

© 2010 Pearson Education, Inc. All rights reserved 0-2

• Banks and other financial institutions offer

© 2010 Pearson Education, Inc. All rights reserved 0-3

• Depository • Depository institutions take in

© 2010 Pearson Education, Inc. All rights reserved 0-4

• Depository institutions generally pay interest

© 2010 Pearson Education, Inc. All rights reserved 0-5

• Nondepository • Nondepository institutions

© 2010 Pearson Education, Inc. All rights reserved 0-6

• Automatic teller • Depository institutions can differ on

© 2010 Pearson Education, Inc. All rights reserved 0-7

• What are two types of financial institutions?

© 2010 Pearson Education, Inc. All rights reserved 0-8

• Depository and nondepository institutions

© 2010 Pearson Education, Inc. All rights reserved 0-9

• One of the more widely used banking

© 2010 Pearson Education, Inc. All rights reserved 0-10

• When you write a check for

© 2010 Pearson Education, Inc. All rights reserved 0-11

© 2010 Pearson Education, Inc. All rights reserved 0-12

• We open checking accounts because it allows

© 2010 Pearson Education, Inc. All rights reserved 0-13

• Jim’s checking account balance was $541.39

© 2010 Pearson Education, Inc. All rights reserved 0-14

• Solution: $541.39 + $50 - $28.32 - $8 =

© 2010 Pearson Education, Inc. All rights reserved 0-15

• Negotiable order of • Money kept in ordinary

© 2010 Pearson Education, Inc. All rights reserved 0-16

• Debit card enables you • Many banks provide debit cards

© 2010 Pearson Education, Inc. All rights reserved 0-17

• Debit cards are convenient but can

© 2010 Pearson Education, Inc. All rights reserved 0-18

• Tucker used his debit card to withdraw $40

© 2010 Pearson Education, Inc. All rights reserved 0-19

• Solution: That was an expensive withdrawal

© 2010 Pearson Education, Inc. All rights reserved 0-20

• Check register is a • The amount you open an

© 2010 Pearson Education, Inc. All rights reserved 0-21

• Keeping an accurate balance is essential

© 2010 Pearson Education, Inc. All rights reserved 0-22

• Some checking accounts do not have overdraft

© 2010 Pearson Education, Inc. All rights reserved 0-23

• It is possible for errors—yours or the bank’s—

© 2010 Pearson Education, Inc. All rights reserved 0-24

© 2010 Pearson Education, Inc. All rights reserved 0-25

• Mary Beth’s checking account balance on

© 2010 Pearson Education, Inc. All rights reserved 0-26

• Solution: Outstanding checks are checks that

© 2010 Pearson Education, Inc. All rights reserved 0-27

• Why are checking accounts useful?

© 2010 Pearson Education, Inc. All rights reserved 0-28

• They enable you to carry less cash, keep

© 2010 Pearson Education, Inc. All rights reserved 0-29

• Banks offer a variety of different services

© 2010 Pearson Education, Inc. All rights reserved 0-30

• Safety deposit boxes • Safety deposit boxes are

© 2010 Pearson Education, Inc. All rights reserved 0-31

• Cashier’s check is a • Banks are also a source of

© 2010 Pearson Education, Inc. All rights reserved 0-32

• Money orders are • Money orders function similar to