Unit VIII banking products and services

LEARNING OBJECTIVES

After studying this unit, you should be able to:

• examine topics and subtopics and predict content related to a variety of products and services the banks offer;

• apply reading skills to comprehend, analyze, and interpret texts related to the role of banks in financial intermediation, key features of banking products and services, the way how financial products and services satisfy the needs of customers (i.e. recognize main ideas in paragraphs, definitions, explanations, examples, classifications, comparisons and contrasts, sequence of events, cause/effect, pros and cons);

• use strategies to reinforce comprehension skills (i.e. use graphic organizers to visualize connections between main ideas and supporting details, cite evidence for main ideas, answer literal and critical comprehension questions);

• identify the main ideas, recall important details of a listening segment pertaining to the banking products and services, take notes from spoken context as well as relate new information to previously acquired concepts;

• give spontaneous and prepared monologs, dialogs, and group interaction using topical vocabulary;

• summarize, annotate, render and translate texts related to the issues covered in the unit.

Exercise1. Discuss these questions.

1. How often do you go to the bank?

2. Which of the following banking products and services do you use?

   a current account (BrE)/ a checking account (Am E) a savings or deposit account (BrE)/ time or notice account (Am E) cashpoint (BrE)/ ATM (Automated Teller Machines, AmE)

   a chequebook (BrE)/a checkbook (AmE) a credit card a debit card a loan a mortgage an overdraft

   foreign exchange investment advice internet banking (payments, transfers) telephone banking (payments, transfers)

3. What other products and services does your bank offer?

Exercise 2. Comment on the following quotations. What do the authors mean? Do you agree with them?

1. “Banking gives you a glimpse into what makes companies succeed and what makes companies fail”.( Sally Jewell)

2. “I saw a bank that said '24 Hour Banking,' but I don't have that much time.” (Steven Wright)

3. “They usually have two tellers in my local bank, except when it's very busy, when they have one. ”(Rita Rudner)

Exercise 3. Read the text.

Banking products and services

Banks, as financial intermediators, act as the go-between for individuals and businesses that have extra money and those that wish to borrow money. The modern bank performs the following functions: thrift, credit, payment, cash management, underwriting, investment/ planning, brokerage, insurance and trust.

Banks today offer a wealth of products and services including numerous bank accounts. The accounts with credit balances held with the bank are called deposits. There are two major categories of deposit accounts in the USA: transaction accounts and savings accounts. Transaction accounts are established for the convenience of the account holder. Funds in a transaction account can be accessed without notice to the bank or withdrawn at any time without penalty. This kind of an account is a current one and its most common use for individuals is a single regular payment in either a weekly wage or a monthly salary and regular payments out to meet the normal everyday expenses. Most payments are still made by check although the use of the standing order or the direct debit is becoming very common. Normally transaction accounts include non-interest earning checking accounts and interest earning checking accounts. A demand deposit account does not pay interest and is commonly known as checking account because it is a sum standing to the credit of the customer which the bank undertakes to meet checks drawn against them or as cash across the counter. A demand deposit does not have a withdrawal advance notice requirement, there is no maturity period required before funds can be withdrawn and it is payable on demand. Negotiable orders of withdrawal accounts (NOWaccounts) frequently known as interest checking or gold checking normally pay interest but the interest rate on NOWaccounts is usually relatively low when compared to savings accounts.

Since money in a transaction account either does not attract interest or it is very low it is not a good idea to maintain large cash balances, these would be better transferred to a savings account or to an alternative form of savings. If customer of a bank who has opened a savings account also has a current account regular payments into a deposit account can be made through a standing order to the bank who will automatically transfer the agreed amount according to your instructions. An example of savings accounts is a time deposit account (such as a Certificate of Deposit [CDs]). Time deposits always have the exact maturity date that is always disclosed in advance and agreed to by both parties. Interest is paid on the deposit balance after the maturity date or when specified in the account contract. If the deposit is automatically renewable, this fact must be clearly marked on the written contract along with the terms of renewal. Many account holders automatically renew their CDs when they reach maturity because they do not yet need the money on deposit. The presence of an early withdrawal penalty is a key element of time deposit accounts.

Granting credits to qualified borrowers is another economic function of banks. There are two ways in which you can borrow: to spend more money than you have in your current account i.e. to overdraw or to get a loan.

If a manager permits an overdraft on current account he is likely to set a limit to the size of the overdraft and may stipulate the date by which the account is back in credit. Of course, a bank charges interest on the overdrawn amount.

If a loan is granted it will be a fixed sum immediately available for a fixed period of time. The principal and the interest on it may all become due for repayment at the end of that period or repaid in equal regular installments over the period of the loan. The two major categories of loans are business and consumer. Business loans can be secured or unsecured and are primarily classified into three categories: short term, long term, and a line of credit. Short-term business loans typically have a term of less than one year and may be used for purposes such as purchasing inventory or for a seasonal need. Long-term business loans are made for a term longer than one year and may be used for purposes such as expanding a business or purchasing equipment. They are usually repaid from business income in installments. A line of credit is essentially a preapproved credit limit against which the business borrows. A line of credit can be closed or open end. In a closed-end line of credit, the business borrows and repays the funds within a certain time limit. In an open-end line of credit, the business can borrow any amount up to the approved limit, make repayments, and borrow again up to the limit.

Consumer loans include installment credit and mortgage loans. Installment credit whether it is secured or unsecured is essentially a loan or credit account on which the payments (including interest) are made at regular intervals. If the interest rate is fixed for a set term (such as a car loan), the payments are for a fixed amount, and the loan amount and interest are fully repaid by the end of the term. Loans with real estate as the security for loan repayment typically used to purchase a home are commonly called mortgage loans.

Banks also make loans of reserves to other banks through the federal funds market and to securities dealers through repurchase agreements. Far more important in dollar value, however, are direct loans to both businesses and individuals.

These days check clearing is still an important payment system, although today the banking system processes more and more electronic transactions to make payments and transfer funds. Electronic transactions allow for instantaneous transfers of funds to almost anywhere in the world. Customers now have access to such a variety of electronic banking services that they can execute most banking transactions remotely. Electronic banking services include remote terminal transactions, telephone transactions, and other electronic transactions such as those conducted via the Internet. Remote terminals are simply machines that allow customers to access accounts without the personal assistance of a bank employee. A popular type of remote terminal is an automated teller machine. ATMs allow customers to conduct a variety of transactions on their accounts, such as withdrawals, deposits, loan and credit card payments, and balance and account history inquiries. Currently the most frequent method of providing authorized access to a person’s account is through the use of a plastic card and an access code called a personal identification number (PIN). Some machines use biometrics to check identity. Another type of remote terminal is a point-of-sale (POS) terminal. A POS terminal is located at a merchant, and the customer uses the terminal to authorize a transfer of funds from his or her deposit account directly to the merchant’s bank account. To authorize the transaction, the customer presents a debit card.

Another banking service that may be available to customers is a safe deposit box. Customers rent metal boxes (various sizes are available) that are stored in a vault in the bank. In these boxes, customers typically store valuable papers and small objects, such as family heirlooms. The boxes have two locks so that unauthorized access is prevented; the customer has one key and the bank has the other.

The umbrella term of cash management includes services provided primarily to businesses that help keep funds working, speed up the payment receipt process and improve profitability. For example, thanks to cash management services balances in transaction accounts are kept low and other idle funds are maintained in interest-earning accounts.

Bank trust divisions act as agents for corporations and other businesses in a host of different ways. This may involve issuing securities on the business customer’s behalf, paying dividends or interest owed on any securities issues, reinvesting the dividends for security holders who request that service, and retiring the securities at maturity. Trust departments also handle transfers of ownership of corporate stock, conversion of stocks into debt and they issue proxies and count votes in connection with annual stockholder meetings. Banks frequently serve as trustees under indenture and must make sure all bond covenants agreed to by the issuing corporation are adhered to and that all required liens against the company’s property are duly filled and recorded. Besides the bank will establish and manage a sinking fund. The fiduciary activities of banks make a critical contribution to the functioning of the commercial paper market. Bank trust departments keep records on which investors purchase commercial paper, see that any notes purchased are actually delivered to the investors involved, and pay off the holders of those notes on the maturity date. Even more important, banks issue letters of credit backstopping issuers of commercial paper in order to reassure investors that the bank will pay off a note issue if the borrowing corporation cannot do so.

Making foreign exchange transactions, providing traveller’s cheques, issuing credit and debit cards, private banking for high net worth individuals, providing retirement plans and many other products and services of banks are tailored to customer’s needs and make banks akin to financial supermarkets.