1. Unit 4 Financial Institutions Target B: I can explain the role of financial institutions. 1

2. What is a Financial institution?  A financial institution is an organization that provides financial products and services to customers.  Financial institutions provide products like checking and other accounts that help consumers manage money. They provide services and advice to help consumers meet their financial goals. 2

3. Why Financial Institutions?  Fulfill economic goals  Reduce transaction and information costs  Provide liquidity  Prevent risks  As a transmission of monetary policy  Provide payment mechanism  Supply credit allocation 3

4. Functions of Financial Institutions 1. Aids the flow of capital 2. Credit allocation—the distribution of credit 3.Provides economies of scale –  the greater the quantity of a good produced, the lower the per-unit fixed cost because these costs are shared over a larger number of goods. 4. Satisfies the needs of the general public 4

5. Functions of Financial Institutions 5. Provides specialization and expertise 6.Assists asset transformation  Asset transformation is the process of creating a new asset (loan) from liabilities (deposits) with different characteristics by converting bank deposits into loans. 7.Offers INTERMEDIATION  For example, in the sale of a house, a bank usually serves as a financial intermediary by providing a mortgage to the buyer to pay the seller. In some non-traditional transactions, a bank may buy a product (e.g. corn) and immediately re-sell it for a profit to a third party. 5

6. What are the benefits of having financial institutions in the economy? 6

7.  Financial institutions can provide a safe place for individuals to hold money, and they help channel money from savers to borrowers.  Banks, credit unions, and insurance companies are examples of financial institutions. What are the benefits of having financial institutions in the economy? 7

8. Types of Financial Institutions  By Banking Business Nature:  Banks  Non-Banks  Non-Finance 8

9.  By Business Operations:  Thrift type  Contractual type  Investment type  Other types Types of Financial Institutions 9

10. Thrift-type Financial Institutions  Commercial Banks Offer checking accounts, accept deposits, and make loans  Savings Banks Owned by depositors who make smaller deposits than a commercial bank would handle  Investment Banks (Merchant Banks) 10

11.  Non-Banks:  Deposit-taking Company, Savings and Loan, Home Loans, Building Society  Savings and Loan Associations Allow people to save up and borrow enough for their own homes  Credit Unions  Cooperative lending associations established for particular groups Thrift-type Financial Institutions 11

12. What agencies insure each of these financial institutions?  Banks and savings and loan companies are generally insured by the Federal Deposit Insurance Corporation (FDIC) and credit unions by the National Credit Union Share Insurance Fund (NUSIF). Consumers should be aware that not all deposits are insured.

13. Contract-type Financial Institutions  Insurance Companies:  Life Insurance  Accident and Health Insurance  Pension Funds:  Mandatory Providence Funds  Retirement Funds/Pension Funds 13

14. Investment-type Financial Institutions  Investment Companies:  Closed-end Investment Companies - Investment Brokers  Open-end Investment Companies - Mutual Funds/Unit Trust  Real Estate Trust Investment Companies  Finance Companies  A specialized financial institution that supplies credit for the purchase of consumer goods and services by purchasing the time-sales contracts of merchants or by granting small loans directly to consumers. 14

15. Other Financial Institutions  Lease Companies  A finance company that purchases the title to an item (usually equipment/vehicles) then “rents to own” in a contractual agreement. It enables the leasee to use the equipment over the term of the lease agreement and purchase the equipment at the end of the lease term.  Mortgage Companies  A type of moneylender that sells all mortgage loans in the secondary market. The companies might service the loans they create, or they might not. 15

16. Other Financial Institutions  Credit Card Companies  A company that issues a card that may be used repeatedly to borrow money or buy products and services on credit. Issued by banks, savings and loans, retail stores, and other businesses.  Non-finance Financial Institutions:  General Electric, Ford Motors, Toyota Motors  Wholesalers, Manufactures, Department Stores 16

17.  Factors Companies  A financial intermediary that purchases receivables from a company. A factor is essentially a funding source that agrees to pay the company the value of the invoice less a discount for commission and fees.  (This slide is FYI only.) Other Financial Institutions 17

18. What services do credit unions, banks, and savings and loan companies generally provide?  Credit union, banks and savings and loan companies generally offer checking accounts, savings accounts, consumer loans, certificates of deposit and check cashing for depositors.

19. 19 What services do credit unions, banks, and savings and loan companies generally provide?

20. How do financial institutions channel funds from borrowers to savers?  Financial institutions attract funds from savers by offering interest rates on savings. Financial institutions use depositors’ savings to earn income by lending to borrowers or investing in other financial products.  Financial institutions are able to pool the savings of many individuals in order to make loans to borrowers.  Banks create money by lending SaversBanks Borrowers & Investing 20

21.  Financial institutions can provide a safe place for individuals to hold money, and they help channel money from savers to borrowers.  Banks, credit unions, and insurance companies are examples of financial institutions. How do financial institutions channel funds from borrowers to savers? What are some of the types of financial institutions? 21

22.  Financial institutions attract funds from savers by offering interest rates on savings. Financial institutions use depositors’ savings to earn income by lending to borrowers or investing in other financial products.  Financial institutions are able to pool the savings of many individuals in order to make loans to borrowers.  Banks create money by lending 22

23.  Financial markets bring together people who have money to lend and are willing to take risks to earn a return with people who want to borrow for a specific purpose.  Financial institutions act as intermediaries by facilitating the interaction of borrowers and savers in financial markets Essential Understanding 23

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25.  Activity 1………….Why Do You Need A Bank?  Activity 2………The Many Services of a Bank  Activity 3….The ABCs of a Checking Account  Activity 4……….Opening a Checking Account  Activity 5………………….How to Write a Check  Activity 6…..Maintaining a Checking Account  Activity 7……The ABCs of a Savings Account

26. Basic Banking Services - Activity 1 ACTIVITY 1 Why Do You Need a Bank? Overview Purposes of banks The differences between banks and credit unions Safety of financial institutions Banks as money management tools The Earned Income Tax Credit 26

27. SAFETY OF FINANCIAL INSTITUTIONS COMMERCIAL BANKS CREDIT UNIONS Slide 1 – Safety of Financial Institutions Lesson Reference: Basic Banking Services, Activity 1 – Overhead 3 27

28. THE EARNED INCOME TAX CREDIT The Earned Income Tax Credit (EITC) is a federal income tax credit for low- income workers. The credit reduces the amount of tax an individual owes, and may be returned to the taxpayer in the form of a refund. Some states offer additional forms of EITC. Eligible workers must have an annual income and investment income that falls below a certain level. In tax year 2005, for example, if you are married, have two or more children, and are filing your taxes jointly, your combined annual income must not exceed $37,263. You must have a Social Security Number to receive the EITC. In tax year 2005, a family with two or more children could receive up to a $4,400 refund through the EITC.* Slide 2 – EITC Lesson Reference: Basic Banking Services, Activity 1 – Handout 2 28

29. Basic Banking Services - Activity 2 ACTIVITY 2 The Many Services of a Bank Overview Financial services provided by a bank Bank employees Services that might be of personal benefit The impact of state and federal regulations upon the security of a bank 29

30. REMITTANCE OPTIONS TO SEND AND RECEIVE MONEY 1. Money Transfer Organizations 2. Bank Transfers 3. Hand Delivery 4. Mail 5. Hawala 6. Post Offices 7. Stored Value Cards Slide 1 – Remittance Options Lesson Reference: Basic Banking Services, Activity 2 - Overhead 1 30

31. BANK OCCUPATIONS Tellers Platform Bankers Mortgage Lenders Operations Manager Branch Manager Slide 2 – Bank Occupations Lesson Reference: Basic Banking Services, Activity 2 – Overhead 2 31

32. ELECTRONIC BANK SERVICES Online banking is the fastest growing Internet activity in the U.S. Types of Services Bank Cards Automated Services Protect Your Passwords! Slide 3 - Electronic Bank Services Lesson Reference: Basic Banking Services, Activity 2 – Overhead 3 32

33. BANK CARD TYPES Slide 4 - Bank Card Types Lesson Reference: Basic Banking Services, Activity 2 – Overhead 4 TYPE Check Cards or ATM/Debit Cards Stored Value Cards DESCRIPTION Bank cards that allow for the payment of goods and services to be subtracted directly from a bank deposit account. Can be used with merchants that take major credit cards—known as point of sale (POS) transactions. Bank cards with preset, limited value. Used to pay for goods and services. Alternative to cash. 33

34. ELECTRONIC BANK SERVICES Direct Deposit Transfers between Accounts Transfers to a Third Party Online Banking Bank by Phone ATM Slide 5 – Electronic Bank Services Lesson Reference: Basic Banking Services, Activity 2 – Handout 3 34

35. REGULATION OF ELECTRONIC BANKING SERVICES Electronic Fund Transfer Act Protects consumers using any type of electronic banking from loss and protects their privacy. Banks must: Offer consumers a record or receipt for all computer transactions. Investigate errors and report to consumer within ten days of error notification. Customers are responsible to report any errors. Slide 6 - Regulation of Electronic Banking Lesson Reference: Basic Banking Services, Activity 2 – Overhead 5 35

36. Basic Banking Services - Activity 3 ACTIVITY 3 The ABCs of a Checking Account Overview Purposes of a checking account Shopping for and comparing checking accounts 36

37. Slide 1 - Checking Account Terms Lesson Reference: Basic Banking Services, Activity 3 – Handout 1 CHECKING ACCOUNT TERMS Bank Statement Cancelled Check Check Check Register/Ledger Endorsement Fee Interest Minimum Balance Outstanding Transactions Overdraft Overdraft Protection Payee Reconciling a Bank Statement Transaction Limits 37

38. Slide 2 - Shopping Around Lesson Reference: Basic Banking Services, Activity 3 - Handout 2 SHOPPING AROUND (THINGS TO ASK ABOUT WHEN OPENING A CHECKING ACCOUNT) SERVICES Location of bank Location of ATMs Banking hours Minimum balance required Minimum transactions or limits Interest-bearing accounts? Other COSTS Non-primary bank ATM transactions In-branch transaction fees Per-check fees Other checking fees Overdraft protection Printing of checks 38

39. Basic Banking Services - Activity 4 ACTIVITY 4 Opening a Checking Account Overview Checking Account Application Process The Application Acceptable Forms of ID The Signature Authorization Card The PATRIOT Act 39

40. Slide 1 – Opening a Checking Account Lesson Reference: Basic Banking Services, Activity 4 – Handout 1 OPENING A CHECKING ACCOUNT 40

41. Slide 2 - Commonly Accepted Forms of ID Lesson Reference: Basic Banking Services, Activity 4 – Handout 2 Primary ID* Photo Driver’s License issued within the U.S. or Canada State Non-Driver Photo ID Photo Learner’s Permit Government Photo ID U.S. Passport Non-U.S. Passport Resident Registration Card Mexican Consular ID (Matricula Consular) *Financial institutions' ID requirements may differ; check with the institution first before applying for an account. COMMONLY ACCEPTED FORMS OF ID Naturalization Certificate Employee Photo ID (from a recognizable employer) Photo Trade License (barber, plumber, electrician, etc.) Student Photo ID (college/trade school) Medicare Card (must be 65 or older) 41

42. Slide 3 - Commonly Accepted Forms of ID Lesson Reference: Basic Banking Services, Activity 4 – Handout 2 Secondary ID* Pay Stub Car Registration Mortgage Statement Letter of Introduction from Bank, Embassy, or well-known Employer Welfare Card Supplemental Health Insurance Card *Financial institutions' ID requirements may differ; check with the institution first before applying for an account. COMMONLY ACCEPTED FORMS OF ID Foreign Driver’s License State/Local Gun Permit Utility Bill (Name and address of individual account should be listed) Current Bank Statement National Credit Card Bank-issued Debit or Check Card 42

43. THE PATRIOT ACT Congress passed the PATRIOT Act in response to the terrorist attacks of September 11, 2001. Financial institutions are now required to collect certain information when a new account is opened. Slide 4 – The PATRIOT Act Lesson Reference: Basic Banking Services, Activity 4 – Overhead 1 1. The customer must provide identification that includes name, date of birth, address, and identification number. 2. The institution must maintain a copy of the information used to verify the person’s identity. 3.The institution must determine whether the applicant appears on the lists of known or suspected terrorists or terrorist organizations. 43

44. Slide 5 – Signature Authorization Card Lesson Reference: Basic Banking Services, Activity 4 – Handout 3 SIGNATURE AUTHORIZATION CARD 44

45. Basic Banking Services - Activity 5 ACTIVITY 5 How to Write a Check 45

46. Slide 1 - Writing a Check Lesson Reference: Basic Banking Services, Activity 5 – Handout 1 WRITING A CHECK 46

47. Basic Banking Services - Activity 6 ACTIVITY 6 Maintaining a Checking Account Overview Check 21 Keeping a check register Making a deposit into a checking account Reconciling a bank statement Maintaining a checking account Avoiding Overdrafts 47

48. Slide 1 – Check 21 Lesson Reference: Basic Banking Services, Activity 6 – Handout 1 CHECK 21 Check 21 is a federal law that helps banks handle more checks electronically and that makes check processing faster and more efficient. Under this law, a check deposited in a bank is typically “delivered” overnight to the paying bank and deducted from the checkwriter’s account on the next business day. Money may be deducted from your checking account almost immediately. 48

49. KEEPING A CHECK REGISTER Slide 2 - Keeping a Check Register Lesson Reference: Basic Banking Services, Activity 6 – Handout 2 49

50. Slide 3 - Making a Deposit - Endorsing a Check Lesson Reference: Basic Banking Services, Activity 6 – Handout 2 MAKING A DEPOSIT - ENDORSING A CHECK Restrictive Endorsement (most secure) Blank Endorsement (least secure) Endorsement to a third party The Back Side of a Check 50

51. Slide 4 - Making a Deposit - Completing a Deposit Slip Lesson Reference: Basic Banking Services, Activity 6 – Handout 2 MAKING A DEPOSIT - COMPLETING A DEPOSIT SLIP 51

52. Slide 5 - Reconciling a Bank Statement Lesson Reference: Basic Banking Services, Activity 6 – Handout 2 RECONCILING A BANK STATEMENT 52

53. OVERDRAFTS AND BOUNCED CHECKS Overdrafts and bounced checks occur when you complete a financial transaction (e.g., write a check) for more than what is available in the account. Your financial institution may pay the amount and charge you a fee, known as an “overdraft fee” or a “nonsufficient funds fee.” Tip: Avoid overdraft or non-sufficient funds fees by making a habit of monitoring the balance in your checking account. Slide 6 – Overdrafts and Bounced Checks Lesson Reference: Basic Banking Services, Activity 6 – Overhead 1 53

54. Basic Banking Services - Activity 7 ACTIVITY 7 The ABCs of a Savings Account Overview Purpose of a savings account Shopping for a savings account Applying for a savings account Monthly bank statement checkup 54

55. REASONS TO SAVE Emergencies Future Purchases Future Investments Slide 1 - Reasons to Save Lesson Reference: Basic Banking Services, Activity 7 – Overhead 1 55

56. SHOPPING FOR A SAVINGS ACCOUNT Factors to consider: Safety Risk Liquidity Minimum Account Balance Requirements Fees and Service Charges Interest Rate Returns (Earnings) Automatic Transfer Direct Deposit Slide 2 - Shopping for a Savings Account Lesson Reference: Basic Banking Services, Activity 7 – Overhead 2 56

57. OPENING A SAVINGS ACCOUNT Slide 3 – Opening a Savings Account Lesson Reference: Basic Banking Services, Activity 7 – Overhead 3 57

58. Slide 4 – Bank Statement Lesson Reference: Basic Banking Services, Activity 7 – Overhead 4 BANK STATEMENT 58