Banking Services Explained: A Comprehensive Guide
At its most basic level, a bank is a place to safely keep your money. From car loans to credit cards, there are plenty of banking services you may need at different stages of life. And with digital options, you can access many of them right from your phone or laptop. This article provides a review of financial topics to help you learn banking basics.
Why Choose a Bank?
Keeping large sums of money at home can be risky. Even though the odds may be small, there’s always the chance of loss, theft, or even a natural disaster. Dealing with cash for everyday expenses can be a bit cumbersome. A bank account allows you to track your expenses in a single place, which can be helpful if you’re monitoring a budget or building a savings account.
Cash hidden in the cookie jar or under the mattress can’t multiply. But an account that earns interest pays you just for keeping your money there. Rates of interest vary from bank to bank, and from account to account, so you may want to shop around before deciding where to stash your cash.
Accessing Banking Services: Branches, Online, and Mobile
A bank branch is a brick and mortar location where your banking can be done in person. You might pop into a branch for a roll of quarters or a cashier’s check you need right away. You may want to rent a safety deposit box to store valuables or important documents.
Some online banking and mobile apps allow you to bank from almost anywhere on your own schedule. With 24/7 access, you can do everything from managing multiple accounts to paying bills to transferring money. Round-the-clock access also helps some people stay organized. If balancing your checkbook on Sunday evenings suits you, no problem. Some banks allow you the option of banking by phone. Simply call a phone number and speak to a bank employee to do things like check your balance, transfer money, pay bills or handle other banking needs. If you call outside of your bank’s regular business hours, you may have to use an automated system that will take you through the steps necessary to complete your transactions.
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Consumer vs. Corporate Banking
Consumer banking refers to financial products geared toward everyday consumers. Corporate banking, on the other hand, refers to financial products that serve corporate customers.
Banks vs. Credit Unions
Many people wonder how a credit union differs from a retail bank. In general, credit unions offer the same services as a bank, such as checking accounts and personal loans.
To become a member of a credit union, you’ll likely have to be a member of a group to use a credit union and its services, but this is easier than it sounds. Some credit unions simply require you to live in a certain town or city. Some cater to employees who work at the same company. And others affiliate with churches or schools. One thing to keep in mind about credit unions is that they may be smaller than many banks.
Online-Only Banks
While most banks today offer online services, there are also banks that exist solely online.
Essential Banking Products and Services
When you’re thinking about what services banks provide, a checking account may be the first thing you think of. This popular type of account allows you to store and manage the money you use for everyday spending. Once set up, you can use a debit card or check, which will take money directly from your account, to pay for everything from groceries to gas to bills.
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Savings Accounts
A savings account can help you separate the money you want to save from the money you need to spend. For many, it’s an easier way to work toward a goal, like saving for home improvements or building an emergency fund. Most savings accounts can automatically move money from your checking account into your savings account each month, so you don’t even have to think about doing it yourself. An added bonus is that banks usually pay you interest on savings accounts.
Money Market Accounts (MMAs)
An MMA is a type of savings account that often pays higher rates of interest than a typical savings account. The more you put away, the more you may be able to earn. One thing to keep in mind? The longer you save, the greater the return. You can always decide to withdraw your money early.
Certificates of Deposit (CDs)
A certificate of deposit - or CD - allows you to put money in an account for a specific amount of time from six months to five years. A CD typically pays a higher interest rate than a standard savings account.
Debit Cards
With a debit card, you can pay for everyday expenses with just a swipe (and usually your PIN). The money will come straight from your checking account so there’s no need to carry cash if you prefer not to. Plus, if your debit card is lost or stolen, you may not be responsible for unauthorized transactions if you report it in a timely manner.
Credit Cards
A credit card lets you pay for items with a line of credit. In essence, you’re borrowing the money and then paying it back when the bill comes. But remember that different credit cards charge different rates of interest, so it’s important to know what you’re agreeing to (so you don’t end up paying too much in the long run). One way to avoid paying interest is to pay your bill in full each month. You may also want to watch out for annual fees, especially if it’s a card with perks such as airline miles or cash back. Shopping around for a credit card with no annual fees is always an option.
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Loans
Consumer banks provide several different types of loans. Banks may offer ways to borrow money, such as personal loans, credit cards and mortgages.
ATMs: 24/7 Banking Access
An automated teller machine (ATM) is an electronic bank that allows you to complete basic transactions without a branch or teller. You’ll just need your debit card and secure PIN. Some ATMs also allow deposits of cash or checks. While you don’t need to use your bank’s ATM to access your cash, you might have to pay a fee to use others.
Deposits and Withdrawals
Anytime you put money into your account, you’re making a deposit. Anytime you take money out of your account, you’re making a withdrawal. Just like with deposits, you can take out funds at a bank branch or ATM.
Understanding Bank Fees
When it comes to different types of banking products, fees can vary widely. But it’s also possible to find fee-free accounts and services that will likely suit your needs. Common fees for services rendered by some banks include monthly maintenance fees, overdraft fees and ATM fees. Typical fees also include credit card fees and early withdrawal fees for CDs.
The Role of Banks in the Economy
"Bank" is a term people use broadly to refer to many different types of financial institutions. Banks are privately-owned institutions that, generally, accept deposits and make loans. Deposits are money people leave in an institution with the understanding that they can get it back at any time or at an agreed-upon future time. A loan is money let out to a borrower to be generally paid back with interest. This action of taking deposits and making loans is called financial intermediation. Most people and businesses pay their bills with bank checking accounts, placing banks at the center of our payments system.
Reserves and the Multiplier Effect
Banks can't lend out all the deposits they collect, or they wouldn't have funds to pay out to depositors. Therefore, they keep primary and secondary reserves. Primary reserves are cash, deposits due from other banks, and the reserves required by the Federal Reserve System. Secondary reserves are securities banks purchase, which may be sold to meet short-term cash needs. These securities are usually government bonds.
Federal law sets requirements for the percentage of deposits a bank must keep on reserve, either at the local Federal Reserve Bank or in its own vault. It's the excess reserves that create money. This is how it works (using a theoretical 20% reserve requirement):
You deposit $500 in YourBank. YourBank keeps $100 of it to meet its reserve requirement, but lends $400 to Ms. Smith. She uses the money to buy a car. The Sav-U-Mor Car Dealership deposits $400 in its account at TheirBank. TheirBank keeps $80 of it on reserve, but can lend out the other $320 as its own excess reserves. When that money is lent out, it becomes a deposit in a third institution, and the cycle continues. Thus, in this example, your original $500 becomes $1,220 on deposit in three different institutions. This phenomenon is called the multiplier effect. The Federal Reserve can contract or expand the money supply by raising or lowering banks' reserve requirements. Banks themselves can contract the money supply by increasing their own reserves to guard against loan losses or to meet sudden cash demands.
Banks as For-Profit Institutions
While public policymakers have long recognized the importance of banking to economic development, banks are privately-owned, for-profit institutions. Banks are generally owned by stockholders; the stockholders' stake in the bank forms most of its equity capital, a bank's ultimate buffer against losses. At the end of the year, a bank pays some or all of its profits to its shareholders in the form of dividends. The bank may retain some of its profits to add to its capital. Banks earn an average of just over 1% of their assets (loans and securities) every year.
A Brief History of Banking in America
The first American banks appeared early in the 18th century, to provide currency to colonists who needed a means of exchange. Originally, banks only made loans and issued notes for money deposited. Checking accounts appeared in the mid-19th century, the first of many new bank products and services developed through the state banking system. In today's evolving financial services environment, many other financial institutions provide some traditional banking functions. Banks compete with credit unions, financing companies, investment banks, insurance companies and many other financial services providers. While some claim that banks are becoming obsolete, banks still serve vital economic goals. They continue to evolve to meet the changing needs of their customers, as they have for the past two hundred years.
Government Regulation and Economic Policy
Our government's earliest leaders struggled over the shape of our banking system. They knew that banks have considerable financial power. Should this power be concentrated in a few institutions, they asked, or shared by many? We've tried both ways, and our current system seems to be a compromise. It allows for a multitude of banks, both large and small. Both the federal and state governments issue bank charters for "public need and convenience," and regulate banks to ensure that they meet those needs. Since banks hold government-issued charters and generally belong to the federal Bank Insurance Fund, state and federal governments have considered banks as instruments of broad financial policy beyond money supply. Governments encourage or require different types of lending; for instance, they enforce nondiscrimination policies by requiring equal opportunity lending. They promote economic development by requiring lending or investment in banks' local communities, and by deciding where to issue new bank charters. Using banks to accomplish economic policy goals requires a constant balancing of banks' needs against the needs of the community.
Choosing the Right Bank: Key Considerations
Banks offer many services to help you manage your finances. Banking can also provide you with opportunities for saving and growing your funds, which can help you make the most of your hard-earned money. Today, some banks are online-only, whereas others may have both an online presence and brick-and-mortar locations. The latter may have more ATMs and convenient locations, which is something to think about when deciding where to open an account.
FDIC Insurance
It’s also important to know whether a bank is insured by the Federal Deposit Insurance Corporation (FDIC), which protects your money up to a certain amount (per depositor and ownership category at each bank that’s FDIC-insured). The FDIC (Federal Deposit Insurance Corporation) insures assets in banks and the NCUA (National Credit Union Administration) insures assets in credit unions. Most of your assets are federally insured up to $250,000 by the federal government if the institution fails.
Accessibility
Consider things like accessibility. For example, are ATM locations nearby? You can open a Citi checking or savings account easily online or by visiting a branch.
Services You Need
Know what financial services you want from a bank and focus on banks that provide that type of service or offer the financial product you’re looking for.
Fees
Look for low or zero fees. Fees can vary widely depending on the type of banking product or service, as well the bank.
Location
Make sure the bank has locations convenient for you. Find out if it has branches near where you live, work or travel frequently. Check to see if it has ATMs where you need them, so you can avoid ATM fees.
Reputation
Read reviews of the banks and credit unions you’re considering. Compare ratings on customer service and whether you’ll benefit from the products and services they offer. Most people typically stay with the bank they choose for a long time.
Types of Banks
Banks are grouped into categories based on the type of services they provide. Some banks may focus on consumers while others focus on investments, corporations or other sectors of financial services.
Retail or Consumer Banks
Retail banks - also known as consumer banks - offer banking services to the general public.
Credit Unions
Unlike most banks which strive to make a profit for shareholders, credit unions are not-for-profit institutions that accept deposits and make loans. They are owned by their members, passing any earnings back to their membership instead of shareholders. A credit union is a type of bank that is open to a specific category of people who are eligible for membership. It is member-owned and is operated by the members on the basis of people helping people. The ownership structure of credit unions allows them to offer more personalized and lower-cost banking services to their members. Due to their small operating size, credit unions may pay higher interest rates than banks, and customers can build a better relationship with the banking staff.
Savings and Loan Associations
Also called thrifts or S&Ls, savings and loan associations focus primarily on helping people become homeowners. Federal law limits the types of loans and commercial accounts S&Ls can take part in.
Commercial Banks
Commercial banks are standalone institutions or departments within a bank that focus on corporate, government, small business or nonprofit customers. Commercial banks also offer other financial services such as global trade services, merchant services, insurance products, retirement products, and treasury services. Commercial banks are the most common type of bank.
Community Development Banks
Smaller than commercial banks, community development banks - also called CD banks - focus on their local community.
Investment Banks
Investment banks provide complex financial services to clients, such as corporations, large nonprofits, pension funds and governments. Investment banks are banks that provide corporate clients access to the capital markets to raise funds for expansion. They help companies raise funds in the stock market and bond market to finance their expansion, acquisitions, or other financial plans. Investment banks make money by offering advisory services to corporate clients, trading in the financial markets, and representing clients in mergers and acquisitions. include Merrill Lynch, Goldman Sachs, J.P.
Additional Banking Fundamentals
Banking fundamentals refer to the concepts and principles relating to the practice of banking. Banks perform a myriad of functions, including deposits and withdrawals, currency exchange, forex trading, and wealth management. Banks make money by charging an interest rate on loans, where they profit by charging a higher interest rate than the interest rate they pay on customer deposits.
In the United States, banks are regulated by the Federal Reserve. Banks must retain at least 10% of each deposit on hand but can lend out the other 90% as loans. The actual reserve requirement is determined by the Federal Reserve Board of Governors. When the Fed reduces the reserve requirement for member banks, it is implementing an expansionary monetary policy, which increases the amount of money in the economy. All the Fed’s member banks must be insured with the Federal Deposit Insurance Corporation (FDIC). The FDIC was created in 1933 after the Great Depression through the enactment of the Glass-Steagall Act. The FDIC was formed to prevent such occurrences by insuring all deposits that customers keep at the bank. It insures savings accounts, checking accounts, and other deposit accounts.
Leveraging Banking Services for Financial Success
Banks can provide a convenient place to store your money. Banking can also help simplify how you manage your money and support your long-term financial goals in a number of ways. You can use a variety of tools, such as setting up recurring payments and asking to be alerted when your balance gets too low. If you’re working toward a specific goal - for example, saving up for a new car or paying for a home renovation - you can easily track your progress in your savings account. You can also set up automated transfers from your checking account to your savings account to help you save before you spend.
Consider what could help you achieve your financial goals. Are you looking for a way to easily manage your money and save a little? You might decide on linked checking and savings accounts. Do you want to earn a little more interest on savings you don’t need immediate access to? A high-yield savings account or CD might be what you need.
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