1. Chapter 13: Banking The Need for Financial Institutions
The main deposit-taking institutions in Canada are chartered banks, trust companies, caisses populaires, and credit unions.
All invest and lend their customers’ savings and charge fees for services.
Canadian Banking
Banks sell services to earn profits. Most bank revenue occurs when interest is charged on loaned money.
These institutions accept deposits, encourage saving, and keep money safe.
They provide loans to consumers and to businesses, and they handle millions of business transactions.
Institutions provide different services, banking methods, and hours of operations.
CANADIAN BANKING
Banks loan money to consumers, businesses, and the government.
Banks also invest money that individuals and businesses deposit with them, thereby earning interest.

2. The Need for Financial Institutions
The Bank Act
Canadian Constitution 1867 created a common, unified banking system controlled by the federal government.
All banks in Canada operate under the same rules.
1871, federal government passed the Bank Act
outlined the rules and regulations that banks must follow.
government provides banks with a charter or licence that gives them the authority to operate.
known as chartered banks.
The Bank Act
The Canadian Constitution of 1867 gave the federal government control over money and banking.
Federal parliament passed the first bank act in 1871.
Receiving a charter allows an institution to use the word “bank”.
The Bank Act outlines procedures for new banks and mergers and gives details about what a bank can and cannot do.
The Bank Act is reviewed and revised every few years.
The last revision occurred in 2001.
In 1980 the revisions allowed foreign banks to operated in Canada for the first time.
See Table 13.1, “The Three Classes of Canadian Banks”, on page 398.
See Table 13.2, “Canada’s 19 Schedule I Banks”, on page 399.

3. The Bank Act established three classes of banks
The Bank Act (cont’d)
The Bank Act established three classes of banks
Schedule I (CIBC, TD, President’s Choice)
Schedule II (Amex Bank of Canada)
Schedule III (Citibank)
To encourage more competition. The bank’s ownership determines its class.
Schedule 1 banks Big 5 – BMO, CIBC, Scotiabank, RBC, TD
Schedule II – usually foreign owned, controlled by small number shareholders ie HSBC, ING)
Schedule III – foreign banks permission to operate in Canada ie Capital One, Citibank

4. The Need for Financial Institutions
Branch Banking
is a system in which there is a head office and interconnected branches or outlets providing financial services to different parts of the country.
The Bank of Canada
helps to keep the Canadian economy as stable as possible in part by regulating the money supply.
Borrowing rate by chartered banks is indicated by the bank rate or prime lending rate that the Bank of Canada sets several times a year.
Branch Banking
Schedule I banks have head office in one of Canada’s main cities.
Head offices determine policies and is connected to the branches across the country.
See Table 13.3, “Branch Banking in Canada”, on page 400.
The Bank of Canada
The Bank of Canada is operated by the federal government, it is Canada’s central bank; it controls the money supply.
The Bank of Canada can raise or lower the bank rate.
The bank rate is the minimum rate of interest charged by the Bank of Canada for loans made to the chartered banks; also called the prime lending rate.
If interest rates go up, fewer individuals and business borrow money thereby causing the money supply to contract.
If interest rates go down, individuals and businesses borrow money and it causes more money to enter the economy and thereby increasing the supply.
Money supply is the total amount of money in circulation in Canada, including cash and deposits and savings in financial institutions.

5. Other Financial Institutions
Trust Companies
Established late 1800s
traditionally managed and invested consumers’ money
Today they also provide other banking services, such as loans and savings and chequing accounts. Like chartered banks, the Canada Deposit Insurance Corporation (CDIC) protects consumers’ accounts.
Caisses Popularies and Credit Unions
Similar to co-operatives, caisses populaires and credit unions are organized and owned by people who pool and share their resources.
Services are only provided to members and their families who own at least one share in these institutions.
OTHER FINANCIAL INSTITUTIONS
Trust Companies
Often called “near banks”, trust companies offer services such as loans, savings and chequing accounts, purchase and sale of real estate, administration of estates, and maintain trust account for charitable organizations and minors.
The federal or provincial government grants a trust company the right to operate and specifies the types of investment that these “near banks” can make with customer money.
Caisses Popularies and Credit Unions
Members share a common bond of association, such as a profession, place of employment, geographic area, cultural or ethnic background, or religion.
Caisses populaires and credit unions belong to the World Council of Credit Unions.
To borrow money you must have some savings deposited in the institution.
When collective decisions are made each member has only one vote.
Year end profits are paid to members in the form of dividends or rebates.

6. Other Financial Institutions
Insurance Companies
are financial institutions that insure risks.
two general areas that are covered include life and health insurance and property and car insurance.
How Insurance Works
Insurance works by sharing risk. Payments are used from many policyholders to pay out the claims of a few.
pool together premiums paid by policyholders. An insurance company’s pool of premiums can severally drain when major disasters happen.
INSURANCE COMPANIES
Common types of insurance that individuals purchase include house, car, life, accident, property, drug, and health.
Businesses often purchase property or liability insurance and auto insurance.
Insurance for professionals protects them against suits for malpractice or misconduct.
Product liability insurance protects against faulty product or customer injury.
How Insurance Works
Many policyholders pay millions in premiums to the insurance companies, that pool the money to pay out claims.

7. About Accounts
People open accounts at financial institutions to save money and, potentially, to make money or interest.
Opening and Accessing an Account
Personal information, such as a birth certificate, a driver’s licence, or a home address, is required to open an account at a financial institution.
Customers must fill out a signature card with their signature to conduct transactions. They will then receive a special card often referred to as a debit card to conduct transactions at the bank or at an automated banking machine.
Interest rates vary and are dependent on the balance and they type of account.
Usually only a small amount of money is necessary to open a savings account.
An account in one person’s name gives them full control.
A joint account can be opened by two or more individuals.
Withdrawals from joint account may require more that one person’s signature and is dependant on the way the account was set up.
OPEINING AND ACCESSING AN ACCOUNT
Personal information includes full name and home address, date of birth, telephone number, and occupation.
You will also have to provide two current pieces of identification containing a signature and if possible a photograph.
Acceptable identification includes a driver’s licence, credit card, employer identity card, passport, and student card.

8. About Accounts Account Statements and Passbooks
Financial institutions give clients an account statement or a passbook that serves as a record of account transactions. Each account has a unique number that appears on these documents.
Making a Deposit
Deposits can be made at the financial institution or at an automated banking machine (ABM). Personal identification numbers (PIN) are confidential electronic signatures that are necessary to access accounts at ABMs.
Making a Withdrawal
Withdrawals for cash can be made in the financial institution or at an ABM.
Account Statements and Passbooks
The statement and passbook shows all deposits, withdrawals, transfers of money, service charges, and any interest earned on the account.
Account statements are mailed to clients on a monthly basis.
Passbooks can be updated in the financial institution and at many automated banking machines.
Customers can access account information online by using their bank card number and their PIN code.
Making a Deposit
In the financial institution the teller facilitates the deposit either electronically or by filling in a deposit slip and then gives the customer a receipt.
Automated banking machines (ABMs) are computer terminals that allow customers to withdraw, deposit, pay bills, check balances, and transfer money with a bank card (with a magnetic strip) and personal identification number (PIN) code.
ABMs work with an electronic network that validate the bank card and PIN.
The ABM, upon request, provides the user with a paper transaction record.
Transactions made before 3:00 p.m., on business days, are usually processed the same day and after or on weekends and holidays on the next business day.
See “Security Tips for Using ABMs” on page 408.

9. Transaction Accounts
Competition in the financial industry has lead to a greater variety of services and transaction accounts offered to customers.
Reasons for Transaction Accounts
allow people to pay for goods and services with cash, cheques, or debit.
Account details, such as writing cheques, making deposits or withdrawals, paying bills electronically, should be recorded in a transaction register.
Straight Transaction Accounts
usually do not pay interest and are used to pay personal and household bills.
REASONS FOR TRANSACTION ACCOUNTS
Keeping accurate and up-to-date transaction records lets you know how much money is actually available in the account.

10. Transaction Accounts Transaction-Savings (Combination) Accounts
provide ways to save money and to pay expenses.
Financial institutions levy service charges on combination and transaction accounts.
Current Accounts
for businesses that are registered with the provincial or federal government.
must be recorded in the business’ name.
Transaction—Savings (Combination) Accounts
These accounts are part transaction (write cheques, make debit transactions) and part savings accounts (pay small amounts of interest).
Service charges vary with the type of account or service package selected and offered at the institution.
Charges usually apply to the writing of cheques, debit transactions, withdrawals, etc.
Cancelled Cheques
Cancelled cheques are considered legal proof of payment as they have been stamped indicating that the payee received the amount of money.
Current Accounts
No interest is paid on current accounts and service fees are charged for cheques, deposits, and withdrawals.
Statements and cancelled cheques are sent to the business at the end of each month.
These account usually provide a deposit book with duplicate slips for the client’s and the institution’s records.

11. Reconciling the Statement
Reconciliation occurs when the transaction register and the monthly bank statement are compared and matched to ensure they agree.
Monthly reconciliation is important so that the necessary funds are available to cover current and future transactions.
Steps in a Reconciliation
Step 1. Check off transactions that appear on the account statement and the transaction register.
Step 2. List any outstanding cheques and withdrawals.
Step 3. List any deposits in the transaction register and not on the account statement.
Step 4. Subtract Step 2 from Step 3.
Step 5. Enter into the transaction register any transactions on the statement not already entered. Balances of Steps 4 and 5 must match.
Steps in a ReconciliationStep 3: List any deposits in the transaction register and not on the account statement.
Step 1: Check off transactions that appear on the account statement and the transaction register.
Step 2: List any cheques and withdrawals that are in you register but are not on the bank statement.
This list represents withdrawals that occurred after the bank statement cut-off date and cheques that have not cleared through the account.
Cheques that have not been cashed or deducted from the account balance are called outstanding cheques.
Step 3: Deposits listed should be those made since the statement was prepared.
Add this total to the closing balance of your account statement.
Step 4: Subtract the total in Step 2 from the total in Step 3.
Step 5: Example of entries not yet in the transaction register are interest, service charges, debit card purchases, and ABM transactions.
Calculate a new register balance.
The balance at the end of Step 4 should match the balance at the end of Step 5.
If they do not agree recheck your work for errors and if none made contact your financial institution.

12. Writing Cheques
Most cheques are written from a chequebook. However, cheques can be written on anything including blank paper, roofing tiles, or envelopes to name a few. Banks will accept these special “cheques,” but will charge a special fee to process them.
Cheque Essentials
Basic information that must be on a cheque are date, payee, drawee, drawer, amount, and account number.
Security Features
Cheques like currency can be forged. To prevent this, some security features have been added to cheques, such as special inks that change colour when rubbed, watermarks, and special fibres.
Stopping Payments
A stop payment request can be made if you do not want a cheque to be cashed, or if it is lost or stolen.
CHEQUE ESSENTIALS
See “Essential of a Cheque” on page 413.
Date: All cheques need a day of month, month, and year.
Staledated cheques, are dated more than six months prior to the day they are presented at the financial institution are not usually accepted.
Postdated cheques, a cheques with a date on it that is later that the actual date, will not be accepted at a financial institution until cheque’s date.
Payee: The payee is the name of the person or business to whom the cheque is written.
Drawee: The drawee is the financial institution that will honour the cheque.
Drawer: The drawer is the person or business from whose chequing account the money will be taken.
The drawer must sign the cheque on the line in the bottom right corner and the signature should be the dame as the drawer’s signature card.
Amount: The amount of the cheque must appear in both numbers and in words and they must agree.
Numbers should be written close to the dollar sign and the words as far left as possible (followed by a line to fill in the blank space).
The number of cents should be written above the /100 and no cents should be indicated with xx or 00.
Account Number: The account number, that indicated from which account the money is to be drawn, is printed (or can be written) at the bottom of the cheque.
STOPPING PAYMENT
A stop payment is an order requesting a financial institution not to pay a particular cheque.
See “Tips for Writing Cheques”, on page 415.

13. Writing Cheques Cheque Clearing
Cheque clearing is the processing of cheques and the settling of account balances among financial institutions. Cashing a cheque involves about 20 different processes that occur at regional data centres, financial institutions, and their branches.
Magnetic Ink Character Recognition
Magnetic Ink Character Recognition (MICR) is special coded characters printed across the bottom of cheques that are read by electronic cheque sorting machines.
Holds on Cheques
Deposited cheques can have a hold or delay placed on them. This gives the institution time to clear the cheque and make sure that it does not present a risk to the institution it was written on.
CHEQUE CLEARING
Daily, representative of financial institutions exchange cheques and computer or electronic records through regional data centres.
Branches usually receive cheques no later than two days after they are deposited.
Magnetic ink character coding, electronic and digital equipment, and fast, linked computer terminals support the speed and efficiency of the process.
With over a billion cheques handled annually and the huge cost associated with the processing, financial institutions encourage customers to make electronic transactions that reduce costs.
See Figure 13.1, “A Cheque’s Journey Through the Canadian Clearing System”, on page 416.
Magnetic Ink Character Recognition (MICR)
When a cheque is processed through an electronic sorting machine, the encoding line is magnetized and the cheque number, institution and branch numbers, and the account numbers are read.
During clearing two codes for the amount and type of transaction are added.
Holds on Cheques
Holds are a way for financial institutions to ensure that the person or business writing the cheque is willing and able to cover its value.
Holds also protect individuals, businesses, and institutions from loses due to NSF cheques and cheques written for illegal purposes.

14. Shared ABM Networks
Financial institutions introduced ABMs in Canada in ABMs allow customers to access their accounts quickly, conveniently, and accurately. The electronic funds transfer system (EFTS) is a computerized system that facilitates deposits and withdrawals. It also provides customers with a faster and less costly service.
Debit Cards and Direct Payment
In 1993, Canadians began to use their ABM cards as debit cards to make Interac Direct Payment (IDP). This service allowed customers to pay for goods and services at businesses.
Telephone Banking
Telephone banking allows customers the flexibilty to bank at any time and anywhere using a telephone. Customers usually call a toll-free number and use their bank card and PIN code to access a variety of services through computerized voice instructions.
ABMs are found in supermarkets, airports, malls, gas stations, stores, schools, etc.
The three main shared ABM networks in Canada are Interac, Cirrus, and Plus.
Interac is the largest and is a Canadian network that links with Cirrus and Plus, both international ABM networks allowing cardholders access to accounts abroad.
Customers usually pay a fee for each ABM transaction; these charges can add up fast.
DEBIT CARDS AND DIRECT PAYMENT
Interac Direct Payment (IDP) is a method of paying for goods and services electronically that uses customers’ banking cards to immediately and directly transfer funds from their bank accounts to those of merchants or other service providers.
Another name for a bank card, a debit card allows customers to access their accounts electronically at ABMs or at retailers using the Interac direct payment service.
Password or PIN protection is important with merchant transactions as well and ABM transactions.
IDP customers can use remote or mobile card readers to pay for taxis and delivered pizza.
When there is sufficient funds in the customer’s account it is debited and then credited to the retailer’s account.
A direct payment transaction fee may be applied by the financial institution and sometimes even the retailer.

15. Online Banking
Financial institutions also offer customers online banking using computers. With the Internet, customers can now access banking services 24 hours a day, seven days a week (24/7).
Online Banks
Online banks, also known as virtual banks, do not have physical branches. Customers access and communicate with the institution online, on the telephone, by ABM, or through independent professionals.
ONLINE BANKING
The same services, plus others, available via telephone banking are available over the Inernet.
Additional services include the ability to buy RRSPs, and download and print information.
The customer’s PIN code is used to access the Internet system and fee associated with this service are generally lower than traditional in branch services.
See Table 13.4, “Pros and Cons of Online Banking” on page 420.
Online Banking
Examples on online banks include Tangerine (formerly ING DIRECT), President’s Choice Bank, and Citizens Bank of Canada.
These types of banks have lower business costs that they often pass on the the customers through lower fees, lower interest rates for borrowing, and higher rates for deposits.
The negatives involved may include that no personal relationships are established and cheques may clear slower.

16. Other Financial Services
Financial institutions offer different services that vary in cost to meet the needs of individuals and businesses.
Loans
Loans are one of the most important services offered to consumers, businesses, and all three levels of government. Loans generate the major source of income for institutions.
Lines of Credit
A line of credit is a form of borrowing that allows a consumer to gain access to instant credit at a prearranged amount from an institution.
Credit Cards
A convenient alternative to cash and cheques, credit cards allow consumers to buy goods and services worldwide and even obtain cash from ABMs.
LOANS
Loans are made to consumers, businesses, and all three levels of government.
The range from small to multibillion—dollar financing.
Money is only lent if it seems likely that it can be repaid on time.
Term loans, student loans, credit cards, lines of credit, and mortgages are common types of loans.
A term loan involves borrowing money and paying it back at a specific time.
Interest on a loan can be fixed (a set rate of interest for a specified term) or variable (interest rates fluctuate with general rates).
LINES OF CREDIT
This ability to access credit instantly requires payment of interest only on the exact amount borrowed for the number of days that it is used.
Interest rates are usually lower that basic credit cards.
Lines of credit can be critical for new business in the start-up period and for seasonal businesses.
CREDIT CARDS
Many financial institutions offer one of two major credit cards: Visa or MasterCard.
Features, fees, and interest rates on credit cards vary.

17. Other Financial Services
Direct Deposits
the transfer of funds from sources such as an employer directly into a specified account.
Money Orders and Drafts
a form of payment like a cheque in which the issuing institution guarantees payment to the payee.
Similar to a money order, a draft is issued only by a financial institution for a large amount of money.
It is a safe and secure method to receive payment, and guarantees the payee instant access to his or her money.
DIRECT DEPOSIT
The government (tax refund) and employers (pay) can have the funds that they want an individual to have deposited into their bank account thereby giving instant access to the money without any holds.
MONEY ORDERS AND DRAFTS
The money order is also protected if it is lost or stolen.
Often a small service fee is applied to the purchase of a money order.
Money orders can be purchased in a foreign currency and at non financial institutions such as Canada Post.
Some institutions do not differentiate between a money orders and drafts.
Drafts are completed in triplicate (main copy to payee, one copy is for the institution, and a copy (a form of receipt) is kept by the sender).
money transfers have reduced the need for money orders, allowing parents to send children money or pay into an account at another institution.

18. Other Financial Services
Night Depositories
A night depository chute allows customers to make deposits or drop off documents 24/7 that are then processed during branch hours.
Overdraft Protection
For a fee, depositors can have overdraft protection when a cheque is written for more than the funds in the account.
Preauthorized Bill Payments
Preauthorized debit allows individuals to pay businesses using regular, automatic withdrawals from their account.
NIGHT DEPOSITORIES
This service allows business to drop off money in locked pouches into secure chutes thereby reducing the risk of theft and insurance costs to the business.
This can also save the business time as a representative does not have to be present when the deposit is processed.
OVERDRAFT PROTECTION
If an account does not have overdraft protection, the cheque will not be honored and it will be returned marked NSF.
PREAUTHORIZED BILL PAYMENTS
Monthly bills such as a mortgage, cable TV, insurance, etc. can be arranged by giving a company written permission to make withdrawals for an account.
Businesses that charge different amounts monthly have to notify the payor at least 10 days before the payment is due.

19. Other Financial Services
Safety Deposit Boxes
Customers can rent fireproof, metal boxes to store documents and valuables at a financial institution.
Combination Service Packages
Financial institutions offer a range of service packages to clients for a flat monthly fee.
Shopping for a Financial Institution
When selecting a financial institution(s), consider and research the services, location, fees, reputation, and so on that are offered.
SAFETY DEPOSIT BOXES
Safety deposit boxes come in different sizes and they are not covered by insurance.
The institution does not know what is in the box, even though they have one of the keys for it; the renter has the other key (both are needed to open the box).
People often store birth certificates, stock certificates, insurance policies, wills, collector coins, jewellery, deeds, etc. in these boxes
Fees charged are usually based on the box size.
COMBINATION SERVIE PACKAGES
Plans range from the basic with limited transactions per month to comprehensive packages that include some unlimited services including free chequing, personalized cheques, overdraft protection, credit card(s), electronic transfers, etc.
Young people, students, and seniors are often offered special rate packages.
SHOPPING FOR A FINANCIAL INSTITUTION
Printed material and information available online can assist individuals make decisions regarding what financial institution(s) to use.
The Future of Financial Services
Even with technology driven services branch and personal banking will remain a reality in Canada.
Plastic smart cards that house a microchip can store applications (information) such as e-cash and electronic cash.
“Chip” transactions will initially be expensive and time consuming, as terminals and ABMs will have to be replaced.
Electronic and digital technology will keep on driving change in the financial institutions in Canada.