Choosing and Using Financial Services
Learning Goals/Objectives:
• Identify the factors that influence the choice of a checking or savings account.
• Identify the types of checking and savings accounts
• Determine the advantages and disadvantages of using a bank or a check cashing
service.
Overview:
Choosing a financial institution is a challenge. The key is what you want to accomplish - your goals. What do you look for in a financial institution? Your choices should reflect your values, goals, and the banking services you need.
Methods:
Financial Institutions and Services
Types of Financial Institutions
• Commercial Banks
• Internet Banks
• Credit Unions
• Savings & Loan Associations
• Brokerage Firms
• Check Cashing/Payday Loan Companies
Deposit Services
• Checking Accounts
• Savings Accounts
• Money Market Accounts
• Certificates of Deposit (CDs)
Banking Services
• Branch Banking
• Debit Cards/Check Cards
• Check Cashing
• Direct Deposit and Automatic Withdrawal
• Deposit Insurance (FDIC)
• Automated Teller Machines (ATM)
• Online Banking
• Extended Banking Hours
Credit Services
• Credit Cards
• Installment Loans
• Personal/Unsecured Loans
• Lines of Credits
• Mortgage Loans
• Home Equity Loans
• Student Loans
• Small Business Loans
Investment Services
• Retirement Accounts (IRA, 401-K, etc.)
• Stocks and Bonds
• Mutual Funds
Financial Institutions
There are two major types of financial institutions: banks (i.e., deposit-type financial institutions) and nonbanks (i.e., non-deposit-type financial institutions). The choice of which institution you use depends on which institution will serve your needs the best and help you achieve your goals the fastest.
There are many different types of financial institutions that offer the various cash management alternatives. The distinction between the services offered by traditional banks and services offered by non-bank financial institutions is blurring. Basically, those institutions classified as banks offer deposit services.
In the past, each type of financial institution offered specific and limited services. Banks took deposits in the form of checking accounts, savings accounts, and certificates of deposit and they granted credit to qualified individuals.
Savings and loans offered savings accounts and home mortgages. Credit unions were a type of member-owned cooperative. Credit unions made low-interest loans available to their members. Brokerage firms were businesses that bought and sold stocks on an exchange, and offered other financial services.
Deregulation in the financial industry has blurred the lines between these institutions and increased competition among them. Deregulation means that laws were enacted to remove some of the restrictions (or regulations) that affected the industry. For example, savings and loans can offer many types of loans in addition to home mortgages as well as checking accounts. Many commercial banks can now sell stock.
Activities:
1. Explain that people generally have five primary concerns about how they manage their money with financial institutions.
Return How much interest or dividend income will you earn?
Liquidity How easy is it to spend or transfer your funds?
Access How fast or how often can you access your funds?
Safety What is the risk of loss of your funds?
Cost Are there fees or potentials penalties when using services?
2. Students will have varied values about these concerns. Ask the students to consider these questions. Discuss them generally, checking for the level of understanding of the students.
. • Do you want low costs for your banking services?
• Do you want high returns on your deposits?
• What banking services are important to you?
• Will you ever need a loan, mortgage, or working capital for a small business?
• How important is the safety of your deposits and principal?
• Do you want FDIC deposit insurance?
• How often and when do you want to access your funds?
• Are there fees for checks, bounced checks, missed payments, etc.?
• What other services does the financial institution provide?
3. Generally compare banks and check cashing services. A summary is below.
• Check-cashing services charge an average of 2 percent of the check's amount. A
$500 check would result in a fee of $10. Although this may not seem much, if you multiply it by four, you will have paid at least $40 at the end of the month. Some establishments charge 3 percent or more, which means that you could potentially pay much more on fees alone.
• A bank may charge a $10-15 monthly account fee for checking services. This will allow you to cash checks and write checks on your account balance. Some banks offer free checking accounts with minimum balances.
• Check cashing services have multiple locations in cities. They are usually open more hours than banks. Many offer other services, such as calling cards, money orders or wire transfers.
• Many banks have multiple neighborhood branches and branches in grocery stores that are open extended hours. Banks offer a variety of financial services. Banks may have strict policies about bounced checks and high fees. Many people with a history of bounce checks are not able to open bank accounts.
Materials:
Banks vs. Check Cashing Companies
Criteria Commercial Bank Check Cashing Co.
Income
Safety
Access
Liquidity
Cost
_____________
Financial Services
Service Purpose - Advantage
Checking accounts A convenient and safe way to pay by check, not cash.
Savings accounts and CDs Safe places to let your money grow, with more interest.
Automated teller machines Easy access, multiple locations, 24 hour-a-day (ATM) services.
Check Cashing You can cash a check or receive a short-term loan with a check.
Direct deposits and withdrawals You can deposit money or pay bills automatically.
Deposit insurance Your deposits are insured by the FDIC, up to $100,000.
Credit cards You can access credit up to the amount of your approved credit limit.
Installment loans and credit lines You can borrow for major items such as an automobile, education, home improvement, etc.
Mortgages You can borrow to purchase a home.
Home equity loans You can borrow against the equity in your home.
Student loans You can borrow at below-market rates for educational expenses.
Small business loans You can borrow funds for a small business.
Retirement accounts You can save money toward retirement on a tax- deferred basis.
(IRA, 401-K, etc.)
Stocks, bonds, and mutual funds You can invest in corporations or governments to meet your future financial needs.
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