Topic 2
Banking and Basic Financial Transactions
Questions to Think About:
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What are the different types of depository financial institutions?
What are fringe financial services and how do these differ from financial institutions?
What are the different accounts offered?
How do you make the best choice?
What are the necessary steps to maintain an account?
Learning Objectives:
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Differentiate among types of institutions and services offered
Learn documentation requirements for opening accounts
Identify criteria for determining best choice of account
Understand use, features and how to avoid pitfalls of checking accounts
Demonstrate understanding of how interest is calculated
Demonstrating the advantage of savings
Differentiate among savings accounts, investments, certificates of deposit and
money market accounts
Understand fringe financial services – pros/cons (regulatory framework – check
cashers, payday lenders)
Debit / Credit / ATM / Stored value / EBT
How to avoid pitfalls of banking (overdraft, ChexSystems, etc)
Clear overview of potential fees to look out for
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QUESTIONS TO ASK WHEN HELPING CHOOSING AN ACCOUNT
1. What fees are charged for maintenance and use of the account?
2. How many transactions are allowed each month? What is the cost per additional
transaction?
3. Is there a required minimum balance?
4. Are deposits insured and up to what amount?
5. Does this account earn interest?
6. Are there additional charges (e.g., printing checks, stop payment on checks, and use of
ATM, getting assistance in person or on the phone)?
7. Are there hidden fees? BEWARE of fee-based overdraft services!
8. How do these fees compare with what you currently pay for banking/check-cashing
services?
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CHECKING ACCOUNT
Transactional accounts facilitate regular payments through paper checks, internet banking and
bill payment. Payments are drawn against amounts on deposit.
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Making Deposits
 Direct Deposit – Regular, electronically transmitted, funds available immediately
 Signing back of the check for deposit
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Writing Checks
 Written words prevail over numbers
 Cancelled Checks – Checks which have been paid by drawer’s bank are returned to
drawer (now in electronic form)
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Check Register – Record of all deposits, withdrawals, fees deducted, and checks issued
 Balancing check book – Adding all deposits and deducting all checks issued,
withdrawals and fees to know what is available to be drawn against
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Checking Account Statement – Institution’s report of all transactions issued on a periodic
basis (usually monthly)
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Reconciliation with Bank Statement – Comparing check register and statement to
account for all outstanding checks
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Bill Payment
 Automatic arrangement to
pay regular bills from
account
 Online payments made
each time bill becomes
due
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ATM Card – Issued in
connection to a checking or
savings account
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Costs and benefits of having a
checking account
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Point of Sale vs.
Signature-Based Transaction
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 Debit Card – Allows consumer to use card to make payments by deducting
directly from checking or savings account. Often has Visa or Master Card logo. Financial
institutions generally issue ATM/Debit Cards
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“Prepaid cards have grown
exponentially as a segment of the
consumer banking and payments
landscape. In 2009, $124.6 billion
were loaded onto all types of
prepaid cards, a 61% rise from just
the year before.
People use these cards for at least
three reasons. First, increasingly
payments are made to people on
prepaid cards rather than by paper
checks. Second, effective
marketing of these cards have
made them fashionable to some
populations. And third, these cards
offer a way for consumers who are
unbanked to make purchases with
electronic payments rather than
cash.
As a prepaid banking-type debit
card industry has emerged, so too
have bad actors peddling predatory
products with high fees. They offer
inconsistent and often inadequate
levels of consumer protection, and
they charge high fees, in multiple
ways, that are often a mystery and
an unpleasant surprise to
consumers, with terms generally
buried within the fine print.”
- Jonathan Mintz, Commissioner
NYC Department of Consumer Affairs
Example:
The Kardashian Kard*
Card Purchase Fee
$9.95
Monthly Fee
$7.95
Adding Money
$1.00
Calling Customer
$1.50
Service and Speaking to Live
Operator
Card Cancellation
$6.00
NOTE:
Things to Consider:
If Already Using a Prepaid Card:
 Avoid a reloading fee by using direct deposit
 Instead of accessing cash from a non-network ATM, look at
availability of “get cash back” when making a purchase
 May be vulnerable to losing money if prepaid card is lost or
stolen and used by others to make fraudulent transactions
*Withdrawn after public outcry
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Overdraft – When a checking account goes below a zero balance
 Overdraft Protection Plans – Banks cover transactions when the account has a
negative balance with fees possibly exceeding the payment itself!
o This is extended not only to checks but also ATM and debit card
transactions
o The median overdraft fee is $27 (APRs of 1,000 – 3,500%)
 Consumers may be unaware they have overdrawn their accounts.
 BEWARE OF FEE-BASED OVERDRAFT PROTECTION PLANS! There are other
options to explore.
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WATCH YOUR MONEY GROW
1. Calculating Interest Earned:
Principal (P) x Rate (R) x Time (T) = Simple Interest (I)
a) Generally on an annual basis – apportion if period is less than one year
b) Example:
P = $100
R = 2%
T = 1 yr.
$100 X .02 X 1 = $2.00
Interest = $2.00
To calculate 1 month of interest, divide $2.00 by 12 months.
$2.00 / 12 = $.16 for one month
2. Compound Interest:
a) Interest earned on principal over time, plus interest earned on the interest.
b) Example:
In 2011, Maria kept a $100 deposit (P) for the full year (T) and earned a 2% interest (R).
P x T x R = Interest at the end of the year
($100) x (1yr.) x (.02) = $2.00
On January 1, 2012, she would have $102. Assuming she left $102 on deposit for the
entire 2012 year, on January 1, 2013 she would have a yield of $104.04.
3. Rule of 72:
a) Calculation of time it takes for money to double at a given rate of return
b) Assumes compounded interest annually
c) Divide 72 by rate of return = time it takes for money to double
d) Example:
If you earn 10% on your money, it would double in 7.2 years
(72 divided by 10 = 7.2 year)
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TIME – THE ADVANTAGE OF STARTING NOW!
STARTING TO SAVE EARLY – Assume a 3% Return
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The following example shows you what a difference starting to save early can make.
In this case, we have student “A” beginning to save $1,000 per year beginning at the age of 16. By the
time that “A” is 25 years old, she has saved $10,000. If she never puts any more of her own money into
the account, at the rate of 3% per year, Student “A” will have $38,517.33in her account by the time she is
50 years old. In other words, for her input of $10,000, she has gotten a return of $28,517.33.
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Compare what happens to student “B” who does not start to save until he is 26 years old.
Assuming “B” saves $1,000 per year for 25 years, at the rate of 3%, by the time “B” is 50 years old, he will
have input $25,000 to have $36,323.01 in the account. His return on his input of $25,000 is only
$11,323.01. In other words, Student “B” put in two and half times the money that Student “A” did and
yielded less half of the money that Student “A” yielded.
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CHOOSING THE RIGHT ACCOUNT FOR THE CONSUMER’S NEEDS
Checking Accounts
Necessary to transact daily business of paying bills, and centrally gathering funds before
allocating for expenses, savings and expenses
Savings Accounts
Putting aside funds for short term goals with some interest yield
Certificates of Deposit
Short term goals, do not need immediate access to funds, low tolerance for risk (as
compared to stock market) looking for predictable higher return than regular savings
account
Money Market Accounts
May need access to funds through a checking facility, short terms goals, collect low
amount of interest
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Topic 2 Exercise #1
Case Study
After taking English language classes and a food service class, Marta’s mother Cecelia (age 59)
was able to start an entry level job at a local eatery. Her net paycheck each week is $175.
Since she came to the United States a few years ago, she has no banking relationship or credit
established. She went to the local bank to try to open an account but was told that she needed
to maintain a minimum balance of $1,500, or she would be charged $15.00 every month. They
also asked her for documentation to establish her identity and for a tax number. She pays her
bills either in cash or by money order. She cashes her paycheck at a check cashing place near
home because the employer’s bank does not cash payroll checks.
Marta and Bobby have asked you to work with her. What information would you request from
Cecelia? What guidance would you give Cecelia? Should she open a banking account? Would it
be more beneficial to get a checking account over a savings account or vice versa; should she
have both?
© January 23, 2013
Cities for Financial Empowerment Fund
All rights reserved.
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