TYPES OF FINANCIAL

SECTION 10.1ComparingFinancialInstitutionsSECTION 10.2 BankingElectronicallySECTION 10.3 Managing aChecking AccountSECTION 10.4 Using Other PaymentMethods

• Read the title of this chapterand describe in writing whatyou expect to learn from it.

• Write down each key term,leaving space for definitions.

• As you read the chapter,write the definition besideeach term.

• After reading the chapter,write a paragraph describingwhat you learned.

S E C T I O N 1 0 . 1

ComparingFinancialInstitutionsYou could stash your money in an oldjelly jar or hide it under the mattress.Keeping your money in a bank, how-ever, is safer and wiser.

HOW BANKS WORKThe term “bank,” in a general sense, refers to any type of

financial institution where you may deposit money.Consumers look to banks as secure places to save money,obtain credit, and withdraw cash.

When you deposit money in a bank, it doesn’t just sitthere. Your money is lent to borrowers who need cash forbusiness or personal financial needs. However, you canaccess your money on demand.

When the bank loans some of your money to other peo-ple, those borrowers pay interest to the bank. Interest is afee paid for the opportunity to use someone else’s moneyover a period of time. If you have a savings account, thebank pays you interest for letting it use your money.Because the interest paid by borrowers is generally greaterthan the interest paid to savers, banks make a profit fromthese transactions.

In addition to providing savings accounts and loans,banks fulfill other basic functions. For example, a typicalbank offers checking accounts, safe deposit boxes, and per-haps investment and financial planning services.

Objectives

After studying this section, youshould be able to:• Describe the services offered

by financial institutions.• Distinguish among various

types of financial institutions.• Explain guidelines for choosing

a financial institution.

Key Termsinterestcommercial bankmutual savings banksavings and loancredit unioninternet bankFDIC

237

238 • CHAPTER 10 Banking

• Mutual savings banks are state-charteredfinancial institutions operated by trusteesfor the benefit of depositors. Profits areeither paid to depositors as interest orheld in reserve.

• Savings and loans are financial institu-tions that originally specialized in provid-ing funds to home buyers, but now pro-vide a variety of financial services.Although some are owned by shareholdersand operated for profit, many are ownedby their depositors. Other types of savingsassociations, such as federal savings banks,are similar to savings and loans.

• A credit union is a nonprofit financialinstitution owned by its members. Themembers have a common bond, such asworking for a certain employer, belongingto a labor union, or living in a certainregion.

• An Internet bank is a financial institutionthat operates exclusively over the Internetusing online banking. Since Internet banksdo not maintain branch offices or employtellers, they operate efficiently and canpass along their savings to customers.Thus, they may offer higher deposit ratesand lower loan rates than traditional“brick-and-mortar” banks. In otherrespects, an Internet bank operates muchthe same as other financial institutions.

TYPES OF FINANCIALINSTITUTIONS

All financial institutions must have a char-ter, a document from the federal or state gov-ernment that grants them the right to operatewithin certain legal limitations. From theconsumer’s viewpoint, all financial institu-tions that accept deposits are similar. Themain differences have to do with how theyare owned and regulated. See Figure 10-1.

• Commercial banks are financial institu-tions owned by shareholders and operatedfor their profit. In general, banks thatoperate for the profit of shareholders paylower interest rates on savings accountsand charge more for loans than nonprofitfinancial institutions.

10-1

Banks, savings and loans, and credit

unions are similar in many ways.

What types of services do they offer

to consumers?

Section 10.1 Comparing Financial Institutions • 239

CHOOSING A FINANCIALINSTITUTION

In addition to Internet banks, you may beable to choose from locally owned banks andbranches of regional or national institutions.You might do all your banking at one placeor become a customer of several differentbanks. To choose wisely, consider the follow-ing factors.

• Deposit insurance. In the event ofbank failure, deposit insurance protectsyou from losing the money in youraccounts. The FDIC, or Federal DepositInsurance Corporation, is a federal agencythat insures savings, checking, and otherdeposit accounts in most commercialbanks, savings banks, and savings associa-tions. If the financial institution goes outof business, the FDIC will reimburselosses in insured accounts up to a maxi-mum amount per depositor. For creditunions, similar deposit insurance isadministered by the National CreditUnion Administration. Both FDIC andNCUA insurance are backed by the fullfaith and credit of the U.S. government,making deposit accounts safe and secure.See Figure 10-2.

• Services and convenient access.Find out what services are offered by thebanks you’re considering. Choosing onebank that offers all the services you willuse may be preferable to dealing with dif-ferent banks for different needs. Does thebank operate branch offices near you withconvenient hours of operation? If not, canyou conduct your transactions anotherway—such as over the phone or on theInternet—and will that type of access besufficient?

• Rates and fees. Compare interest rates,fees, and special account requirements.You can get this information from a bankemployee or on the bank’s Web site. Keepin mind that some financial institutionsoffer better terms if you maintain a cer-tain balance or combination of accounts.You’ll learn more about evaluatingaccount terms later in this chapter.

10-2

Make sure the financial institution you

choose displays one of these symbols, indi-

cating it has federal deposit insurance.

What is the advantage of having your

deposits federally insured?


Can Consumer Saving Sink The Economy?

Can the money you put away in a savings account effect the economy? It can—anddoes, for better and for worse.

As you’ve read, banks and other financial institutions loan consumers’ savings to busi-nesses to pay for expansion. A growing business employs more workers, buys more rawmaterials and services, and pays more in taxes, all of which contribute to a thrivingeconomy. If savings are low, the bank may borrow money from another financial institu-tion, including those in other countries. Some companies may turn to foreign investors,leaving less money available for investment in the United States. Also, potential investorsworry when consumers don’t save. Low savings are often associated with high spendingand high debt, which can be disastrous toconsumers and businesses if the economytakes a downturn.

On the other hand, extremely thrifty con-sumers can stall economic growth. Everydollar saved is one not spent. If peoplearen’t buying, businesses have no reasonto expand and may even fail. Employmentrates may level out or drop. Meanwhile thegovernment’s tax base, the source fromwhich it draws taxes, shrinks as revenuefrom sales and other taxes also flattens.

Suppose automobile prices are high dur-ing one year. Then the prices go downsignificantly the next year as auto makersbecome more competitve and aim to sellmore cars. What impact do you think thiswould have on overall consumer spendingand saving? How might the economy beaffected?

FIGURE IT OUT

Section 10.1 Review

CHECK YOURUNDERSTANDING

1. Name three of the basic financial ser-vices that financial institutions provide.

2. How does a credit union differ from acommercial bank?

3. What is the FDIC and what is its purpose?

CONSUMER APPLICATIONBank Shopping Make a checklist of ques-tions you would want to ask whenresearching and comparing financial institutions.

Financial ServicesModernization Act

The Financial Services Modernization Actof 1999 transformed the banking industry byeliminating restrictions among companies inthe securities, banking, and insurance indus-tries. This change made it possible for finan-cial institutions to consolidate the financialservices they offer. For instance, banks mayoffer insurance investment services to cus-tomers, and insurance companies may offertraditional banking services. Therefore, youmay want to consider some nontraditionalsources, such as your insurance agent, whenyou shop for banking services.

S E C T I O N 1 0 . 2

BankingElectronically

Banking has reached a level of sophis-tication that no one could have imag-ined 50 years ago. Communicationsand computer technology give con-sumers the ability to withdraw cashwhen banks are closed, pay bills with-out writing a check, and view theiraccount balances from home.

ELECTRONIC BANKINGMETHODS

Electronic banking allows transactions such as deposits,withdrawals, and transfers to be completed without a bankteller. Customers can perform transactions themselves orrequest that they occur automatically at certain times. Thekey process in electronic banking is the electronic fundstransfer (EFT), the movement of funds by electronicmeans. Electronic funds transfers can be made in a varietyof ways, such as at a teller machine, by telephone, or overthe Internet.

For financial institutions, electronic banking reducescosts. Consumers also benefit from electronic banking,especially the convenience it offers. By following a few basic guidelines for different types of electronic transac-tions, you can make the most of your self-service bankingopportunities.

Objectives

After studying this section, you should be able to:• Explain various electronic

banking methods.• Give consumer guidelines for

using electronic banking.

Key Termselectronic funds transfer (EFT)ATMPINpoint-of-sale transactiondebit card

241


If you make a cash withdrawal from anATM not owned by your bank, you will likelybe charged a fee at the point of transaction.For example, if you withdraw $50 cash, youraccount balance might be reduced by $52. Bylaw, the amount of the fee must be disclosedbefore you complete the transaction. Inaddition, your own bank may add a fee toyour monthly statement. Planning the timeand place of your withdrawals can help youavoid excess fees.

A PIN, or personal identification number,is the secret code that protects the security ofyour accounts, allowing you alone to accessthem. You must enter the correct PIN in orderto make a transaction. For your security, fol-low these guidelines when using ATMs:

• Know where your ATM card is at all times.If it is lost or stolen, notify the bank.

• Memorize your PIN and never allow any-one else to see it.

ATM TransactionsAn ATM, or automated teller machine, is

a computer terminal that gives bank cus-tomers electronic access to their accounts atany time through the use of a specially codedcard. ATMs are located in public places, suchas bank drive-ups and lobbies, shopping cen-ters, and supermarkets. They are most com-monly used to withdraw cash, makedeposits, transfer money between accounts,and check account balances. See Figure 10-3.

Many ATMs, although owned by differentbanks or businesses, are part of one or moreinterconnected ATM networks. If your ATMcard has a network logo on it, you can use thecard at any teller machine displaying thesame logo.

Before using an ATM card, be sure youunderstand when and how fees will becharged. Many banks allow their ATMs to beused by their own customers for free. Otherscharge a fee if you exceed a certain numberof ATM transactions per month.

10-3

ATMs provide access to your accounts

24 hours a day. Why should you

save your transaction receipts?

Section 10.2 Banking Electronically • 243

• When you enter your PIN, shield thescreen and keypad from the view ofothers.

• Be aware of your surroundings. If younotice suspicious activity, use a differentATM or come back later.

• Pocket your cash immediately after mak-ing a withdrawal. Count it later whenyou’re in a secure place.

Point-of-SaleTransactions

Many ATM cards allow you to do morethan use a teller machine. You can use themto pay for a purchase in the grocery checkoutlane or at a self-service gas pump, deductingthe cost of your purchase directly from yourbank account. This is an example of a point-of-sale transaction—paying for an item bymaking an electronic funds transfer at theplace of purchase.

A card that can be used in this way is actu-ally a debit card—a card that allows the userto subtract money from a bank account inorder to obtain cash or make a purchase.Debit cards are also known as check cards ordeposit access cards.

Two types of point-of-sale transactionscan be made with a debit card:

• Online. An online debit card transactionrequires you to enter your PIN into a key-pad. The money is deducted from youraccount immediately. Some merchants letyou enter an amount larger than the costof your purchase and receive the differ-ence in cash.

• Offline. An offline debit card transactionis possible if the debit card carries the logoof a credit card network. In this case, youuse the debit card just as if it were a creditcard. Instead of entering your PIN, yousign a receipt. The money is not deductedfrom your account immediately, but usu-ally in one to three days.

Using a debit card to make a purchase hassome advantages over writing a check. Thetransaction is generally faster, and you don’tneed to carry a checkbook or present identifi-cation. The drawback of an online transactionis that the money is subtracted from youraccount more quickly than if you had writtena check.

DOLLARSandSENSE

If you bank electronically, follow these tips tokeep your accounts on track.

• Record all transactions in your check regis-ter as soon as you make or schedule them.Be sure that adequate funds are availableto make electronic payments.

• Keep paper receipts of electronic transac-tions. Verify that transactions on yourmonthly bank statement match yourreceipts.

• Find out whether your bank charges a feefor services such as debit card transactionsor online banking. Fees can vary widely.

Tips for Electronic Banking

10-4

Paying utility bills automatically is a great

convenience for consumers. How do auto-

mated payments benefit companies?


receive your paycheck or a governmentpayment, such as a tax refund.

• Automated transfers between youraccounts. For example, you can arrangefor a specific amount to be transferredfrom checking to savings on a certain dayeach month.

• Automated loan payments. If youhave a loan from the same bank, youmight ask for the payment to be automat-ically deducted from your checking orsavings account each month. This elimi-nates the possibility that a payment will belate, missed, or lost in the mail. You mayget a better interest rate on the loan, too.

• Automated payments to a thirdparty. Some utility companies, for exam-ple, let you sign up to have your monthlypayments deducted directly from yourbank account. Instead of a bill, you receivea notice of the next payment amount anddate. See Figure 10-4.

Telephone BankingMany banks allow you to access your

accounts electronically by telephone. Mostsuch systems require you to use a touch-tonekeypad to enter information, but some arevoice-activated. A recorded message will askyou to enter a password or PIN, and thengive you a list of options and instructions formaking your choices. Typical optionsinclude finding out your account balances,making transfers between accounts, andhearing a list of previous transactions.

The quick subtraction of money fromyour bank account is also the main differ-ence between using a debit card and a creditcard. You might view this as a disadvantageor an advantage. The money is gone sooner,but you don’t incur debt on which you mighthave to pay interest.

As with ATM cards, keep your debit cardPIN private. Be sure to keep the card numbersecure, too, since it provides access to yourbank account.

Automated ServicesAt your request, banks will automatically

make electronic funds transfers to or fromyour account. Examples include:

• Direct deposit. Funds are transferredfrom a third party into the account youdesignate. This is a convenient way to

Section 10.2 Banking Electronically • 245

Online BankingOnline banking is offered by many finan-

cial institutions. To use this feature, you needaccess to a computer with Internet capabili-ties. The bank may provide special softwareor tell you to use a Web browser with a secureconnection. A log-in name and secret pass-word help keep the account secure. Someconsumers can bank online using a wirelessphone or other device.

Online banking has several advantages. Itallows you to see a list of recent accounttransactions upon request, rather than wait-ing for a monthly statement. You can com-plete many banking transactions from homeat any time of day or night. You may be ableto pay and receive bills over the Internet aswell, which can save you time and postage.See Figure 10-5.

CONSUMER PROTECTIONThe Electronic Fund Transfer Act, passed

by Congress in 1978, protects consumersusing some forms of electronic banking. TheAct says that banks must offer consumers arecord or receipt for all computer transac-tions. Banks also must investigate errors andreport back to the consumer within ten daysof being told of a problem.

If your ATM or debit card is lost or stolen,report it to the financial institution. If you doso within two business days, you are liablefor no more than $50 resulting from anotherperson’s use of your card. If you wait longer,you could be liable for up to $500. If youdon’t report the loss within two months, youmay be held liable for the entire amount.Most debit card issuers provide more protec-tion against fraudulent use than required bylaw, but this varies.

10-5 Online banking offers real-time

access to your accounts. What are its

advantages and disadvantages compared

to traditional banking?

Section 10.2 Review


1. What steps should you take to keep thePIN for an ATM card secure? Why?

2. Compare and contrast online and tele-phone banking.

3. If a debit card is lost, must the card-holder pay for purchases made by some-one who finds the card? Explain.

CONSUMER APPLICATIONMaking Payments You’re taking out a carloan, and you want to be sure to make all ofyour payments on time. Explain how elec-tronic banking services could help youmeet this objective.

S E C T I O N 1 0 . 3

Managing aCheckingAccountA checking account keeps your moneysafe while giving you easy accesswhen you need it. Whether you use itto write checks, get cash at an ATM,or pay bills online, a checking accountis a basic money management tool.

HOW CHECKS WORKWith a checking account, you can pay someone by writ-

ing a check. A check is a written order that instructs a bankto pay a specific amount of money to a particular person orbusiness. The payee, or the one to whom a check is madeout, can take the check to his or her own bank and cash ordeposit it. The check then makes its way back to your bank,which deducts the money from your checking account andcancels the check. A canceled check is a check that isstamped and sometimes perforated to show that it’s beenpaid.

If you write a check for $100, you’re responsible formaking sure there’s at least $100 in your checking account.Lack of sufficient funds to cover the full amount of a checkis called an overdraft. If you write a check that creates anoverdraft, your check will “bounce.” The unpaid check—usually marked “Not sufficient funds”—is returned to thepayee’s bank. Both you and the payee will probably becharged a substantial fee by your respective banks.Businesses and banks penalize overdrafts because they cost

Objectives

After studying this section, youshould be able to:• Identify reasons for having a

checking account.• Describe factors to consider in

selecting a checking account.•Explain checking account pro-

cedures and responsibilities.

Key Termspayeecanceled checkoverdraftendorsementreconcileoutstanding

246

Section 10.3 Managing a Checking Account • 247

time, money, and effort. Repeatedly writingbad checks is criminal behavior.

Advantages of ChecksChecks are more secure than cash, espe-

cially for sending through the mail. If cash islost or stolen, it can be taken and used byanyone. A check, however, is usable only bythe payee.

Canceled checks provide legal proof ofpayment. Many banks won’t routinely sendyou canceled checks unless you request thisservice and pay an extra fee. However, theymay send you photocopied images of thechecks each month or, for a small charge,provide a copy of a specific check on request.

CHOOSING A CHECKINGACCOUNT

How do you choose a checking accountthat’s right for you? First, get informationabout account terms by visiting the financialinstitution or its Web site. Compare severalaccounts to find the one that best suits yourneeds. Here are some items to check out.

• Minimum balance. You may have tokeep a certain amount of money in theaccount to avoid paying a penalty. It isbest to make sure you can comfortablystay above the minimum.

• Fees. Find out what types of fees areinvolved. These may include a monthlyservice charge, a fee for each check youwrite, ATM and debit card fees, and so on.

• Transaction limits. Some accountslimit the number of withdrawals or thenumber of teller-assisted transactions youcan make for free each month.

• Interest. Checking accounts that earninterest often have more restrictions, suchas a higher minimum balance. Make sureinterest won’t be canceled out by fees.

• Standard overdraft protection. Thebank might automatically transfer moneyfrom savings to checking to cover a checkthat would otherwise bounce.

DOLLARSandSENSE

Does it seem like your bank is taking morefrom your account than you’re putting in? Trythese strategies to lower your fees.

• Adjust your banking habits depending onwhat fees your bank charges. For instance,it may charge for writing checks but not forusing your debit card.

• Meet with a customer service representativeto see whether another kind of checkingaccount could save you money.

• Avoid writing overdrafts. If your bankcharges a flat fee per check or interest foryour overdraft protection, take special careto keep your account from being over-drawn. If possible, keep money in a savingsaccount and opt for standard overdraft pro-tection that draws on your savings accountto pay checks.

• Use your ATM card only at your own bankto avoid other banks’ charges.

Are Your Checking Fees Too High?


The bank needs this time to verify thedeposit. The length of the waiting periodmust comply with federal law, but variesfrom bank to bank. It may also vary depend-ing on where you made your deposit,whether it was in cash or by check, theamount, and the time of day. Financial insti-tutions must disclose their funds availabilitypolicy to customers.

Endorsing a CheckWhen you receive a check, you can deposit

it, cash it, or transfer it to another payee. Fora check to be valid, however, it needs to havean endorsement, a signature on the back ofthe check that entitles the payee to eitherreceive payment or transfer it to someoneelse.

USING A CHECKINGACCOUNT

You can open a checking account whenyou’re 18 years old. The bank will ask you tosign a signature card—a record of how yousign your name, as shown in Figure 10-6. Toverify that a signature on a check is yours, ateller can refer to this card. This helps pre-vent checks from being forged, or used illegally.

The bank will provide starter checks, butnot all businesses accept starter checks forpayment. You can order checks that are per-sonalized with your name and address.

Making DepositsMost banks allow you to make deposits in

several ways—by mail, at an ATM, at a drive-up window, or in a face-to-face teller trans-action. You’ll probably be required to presenta deposit slip. The slip should indicate yourname, account number, the date, the amountyou’re depositing, and in what form (cash,checks, or both). If you’re making a teller-assisted deposit and don’t wish to deposit theentire amount of a check, you can specifyhow much cash you’d like back.

After you make a deposit, there may be awaiting period of one or more days beforeyou can access those funds by withdrawingthem or writing checks against them.

10-6

Your signature card helps to prevent

others from using your checks ille-

gally. If you have a joint account, the

bank requires a signature card for

each person.


When you endorse a check, sign yourname in ink exactly as it appears on the faceof the check. If this differs from your signa-ture card, also add your correct signature.Depending on what you want to do with thecheck, you can endorse it in one of threeways.

• A blank endorsement consists of onlythe endorser’s name. This endorsementmakes the check payable to anyone whopresents it for payment.

• A special endorsement limits pay-ment to a particular payee. An example is“Pay to the order of Rita Neal,” followedby your signature. Rita Neal then mustendorse the check before cashing ordepositing it.

• A restrictive endorsement limits theuse of a check. If you write “For depositonly” above your signature, the check canbe deposited only to your account. If thecheck is lost, the finder can’t cash it.

Recording TransactionsKeeping an accurate record of transac-

tions will help you know how much moneyyou have in your account and avoid over-drafts. Some checkbooks make pressure-sensitive copies of each check that you write.Others have check stubs for recording infor-mation. The most common method ofrecording transactions is to write them in acheck register kept in your checkbook, asshown in Figure 10-7.

Get in the habit of filling in the check stubor register before you write a check.Remember to also record ATM and debitcard transactions, automated payments,direct deposits, and transfers betweenaccounts.Check Register

10-7 Recording transactions is crucial to maintaining your account accurately.

What might happen if you forget to record a transaction?


When you present a check to a store clerk,you may be asked for photo identification,such as a driver’s license. This helps assurethe clerk that you are the person whose nameis on the check.

Writing a CheckWrite checks in ink so that they can’t be

altered. If you make a mistake, you shouldtear up the check, enter the check number inyour register, and write “VOID” next to thenumber. Figure 10-8 shows the correct wayto write a check.

10-8 Be sure to write legibly when filling out a check. Why do you suppose

the amount must be written twice?

Writing a Check


If a check is lost or stolen after you’vesigned it, tell your bank to stop payment onthe check. That means the bank will refuse tohonor it. Since there is usually a sizeable feefor this service, be careful not to lose signedchecks. Unsigned checks, too, should be safe-guarded. If your checkbook falls into thewrong hands, there is a risk that checks couldbe forged. Report a lost checkbook to yourbank immediately.

Receiving Your BankStatement

Once a month, your bank will send you astatement of your account. It shows theopening balance from the beginning of thestatement period, a list of financial transac-tions conducted during the month, servicecharges, and the closing balance. If yourbank does not return canceled checks, besure to save your statements as records. Anexample is shown in Figure 10-9.

10-9 Your bank statement shows the same transactions that you record in your

check register. What was the total amount of withdrawals?

Bank Statement


mistakenly show that your account has moremoney than it really does, your accountcould easily become overdrawn.

If you’re using financial software to keeptrack of your checking account, you can fol-low the software’s instructions for reconcil-ing and let the computer perform the neces-sary calculations. However, reconciling byhand isn’t difficult if you take it step by step.Start by gathering your check register (orother transaction record) and your bankstatement. Most statements include a recon-ciliation form, usually printed on the reverseside. Figure 10-10 shows an example. If your

Reconciling YourAccount

As soon as possible after receiving yourbank statement, you should reconcile youraccount. To reconcile a bank account meansto bring the bank statement and your ownrecord of transactions into agreement. Thisprocess is also called balancing your check-book. By reconciling your account promptly,you can correct any errors, whether yours orthe bank’s, before they cause problems withyour account. For instance, if your records

10-10 Reconciling involves making sure that you and your bank

agree on how much money is in the account. What kind of error

might the bank make?

Reconciliation Form


statement doesn’t include one, you can use aplain sheet of paper. You’ll also need a pen orpencil and a calculator.

• First, look for transactions listed on thebank statement that you have notrecorded in your check register. For exam-ple, the bank statement may list a servicecharge, or you may have forgotten torecord an ATM withdrawal. Write thesetransactions in your register and updatethe balance. However, if you think thebank statement lists a transaction in error,make a note to contact the bank about it.

• In the column of your check registerheaded by a , put a checkmark next toeach transaction that appears on the bankstatement.

• Find any transactions in your check regis-ter that you didn’t mark off. These areoutstanding transactions—ones thatwere received by the bank after the closingdate of your statement. On the reconcilia-tion form or a sheet of paper, make twolists of outstanding transactions—one fordeposits, the other for checks and with-drawals. Total each list.

• On your paper or the appropriate part ofthe form, write the new, or closing, bal-ance from the front of your bank state-ment. Add your outstanding deposits tothat figure. Then subtract your outstand-ing withdrawals. The result should agreewith the ending balance in your checkregister. If so, you’ve successfully recon-ciled your account!

If the figures do not match, check yourwork carefully. Sometimes the amount of thediscrepancy can be a clue. For example, ifyour checkbook balance is $23.49 less thanthe figure you came up with on the reconcil-iation form, you may have overlooked anoutstanding check in that amount. Double-check your math on the reconciliation formand in the checkbook register. If you can’tfind a reason for the discrepancy after goingover your figures several times, take yourmaterials to the bank for assistance.

If you suspect there’s an error or otherproblem on the bank statement, such as anATM withdrawal that you did not make,contact the bank according to the instruc-tions given on the statement. To preserveyour rights, you must send a letter to the cor-rect address within 60 days of receiving thestatement that has the error.

Section 10.3 Review


1. Why is sending a check through the mailpreferable to sending cash?

2. How can you compare checkingaccounts to determine which one wouldbest meet your needs?

3. When and how is a check register used?

CONSUMER APPLICATIONProof of Payment You received a letterfrom the phone company informing youthat you have not paid last month’s bill. Youare certain that you wrote a check for thatbill and sent it to the phone companybefore it was due. How could you provethat you had made your payment?

S E C T I O N 1 0 . 4

Using OtherPaymentMethodsEven if you have a checking account,you might want to use other options tosend money by mail or to pay foritems without using cash. Severalmethods are available through banksand financial service companies.

GUARANTEED CHECKSSome individuals and businesses won’t accept personal

checks because of the possibility of overdrafts. In that case,you might want to use either a certified check or a cashier’scheck. A certified check is a check from a personal check-ing account that has been stamped by the bank to guaran-tee that there are sufficient funds in the account to cover it.The bank puts a hold on the money in the account at thetime the check is certified.

A cashier’s check is a check issued and guaranteed by a bank. You pay the bank with cash or credit, or the bankcan withdraw the money from your account. The bankthen issues its own check to the payee you’ve named.Cashier’s checks are often required for unusually large payments, such as the down payment on a home loan.Some banks charge a service fee for issuing certified andcashier’s checks.

Objectives

After studying this section, youshould be able to:• Describe alternatives to cash,

personal checks, and creditcards.

• Explain possible reasons forusing each form of payment.

Key Termscertified checkcashier’s checkmoney ordertraveler’s checkswire transferprepaid cards

254

Section 10.4 Using Other Payment Methods • 255

MONEY ORDERSA money order is a purchased certificate

used to pay a specified amount to a particu-lar payee. Money orders are a safe, conven-ient way to send payment through the mailas an alternative to personal checks.

Postal money orders are issued and backedby the U.S. Postal Service. You can purchasethem at any post office. There are two types:domestic, which can be cashed at post officesand banks in the U.S., and international. Asmall, fixed fee is charged for a domesticmoney order. Fees for international moneyorders are higher.

Private companies also sell money ordersfor a fee. Typically, these money orders canbe purchased at places such as banks, super-markets, convenience stores, and check-cashing stores. They can be deposited intobank accounts or cashed at retail locationsthat accept them.

TRAVELER’S CHECKSTraveler’s checks are documents that

function as cash but can be replaced if lost orstolen. Because of this replacement feature,and because they are widely accepted, trav-eler’s checks are often used on vacations andother trips. See Figure 10-11.

You can purchase traveler’s checks atfinancial institutions in specific dollaramounts, such as $25, $50, or $100. The ser-vice charge is usually a percentage of the faceamount.

When you buy traveler’s checks, you signeach check in front of the selling agent.When you cash one, you sign it again in frontof the payee. Thus, the payee can be sure thecheck is being used by the authorized person.When you use traveler’s checks to make apurchase, any change due will be given toyou in cash.

After buying traveler’s checks, immedi-ately record the checks’ serial numbers onthe accompanying form. As you cash eachcheck, use this form to note the date andplace you cashed it. Keep this record separatefrom the checks. If your traveler’s checks arelost or stolen, immediately report the num-bers of the missing checks to the companythat issued them. They will make arrange-ments to stop payment on the lost checksand issue you new ones.

MONEY TRANSFERSERVICES

Certain companies offer money transferservices that can send funds almost any-where in the world. Suppose a cousin inanother state has an emergency need for cash

10-11 Traveler’s checks are accepted

throughout the world. Why would merchants

welcome payment with traveler’s checks?


bank to another. Suppose you were about tomove across the country, and you wanted aquick, secure way to transfer money fromyour old bank to your new one. You coulddirect your old bank to close your accountand send the balance to the new bank as awire transfer. Most banks send and receivewire transfers several times a day. They maycharge a fee for sending them, receivingthem, or both.

PREPAID CARDSMany merchants offer prepaid cards,

cards sold in specified dollar amounts thatcan be used to purchase products or services.Also called stored-value cards, they can be aconvenient alternative to cash, debit cards,and credit cards.

When you purchase a prepaid card, youpay for products or services in advance andreceive the card in exchange. Informationabout the card’s value is electronically storedon the card itself. Each time you purchasesomething with the card, the purchaseamount is deducted from the card’s balance.Some cards can be recharged when they runout of money. Phone cards, gift cards, mer-chandise credits, and public transit cards aretypical examples of prepaid cards. See Figure10-13.

and calls you for help. You could initiate anelectronic money transfer by telephone, onthe Web, or by going in person to a businessthat offers this type of service. To receive themoney, your cousin would go to a designatedpickup location and show identification. SeeFigure 10-12.

Transfers paid for with cash are usuallyavailable within minutes. If you pay with acredit card, delivery of the funds can take upto one day. Money transfer services, whilehelpful in an emergency, are relatively expen-sive. The fee for sending $100 might be $15or more.

WIRE TRANSFERSA wire transfer is a financial transaction

that electronically moves funds from one

10-12

To receive a money transfer, you must

show identification, such as a driver’s

license or a state ID. Think of a situation

or problem for which a money transfer

might be the best solution.

10-13 People who use mass transit

regularly can buy prepaid public tran-

sit cards so that they don’t need to use

cash each time they ride. How do pre-

paid cards differ from credit cards?

Section 10.4 Using Other Payment Methods • 257

Most prepaid cards can be used only forspecified types of purchases. However, somecarry the logo of a major credit card networkand can be used to purchase items anywherethe credit card is accepted. Unlike a creditcard, a prepaid card limits spending to thecard’s stored value.

ONLINE PAYMENTSERVICES

Since the Internet has become increas-ingly used for communication and shop-ping, many online payment services havebeen developed. They vary widely but have acommon goal of making payments quickand easy. They also reduce the need to sharecredit card numbers and other personalinformation with each payee.

One type of service is a secure prepaidshopping account. You might set up theaccount by going to a certain Web site andusing a credit card to create a prepaid bal-ance. When you want to shop, you go back tothat site and enter a password, then link to amerchant’s Web page to make purchases.Money for the purchases is deducted fromyour account.

Other services are designed for person-to-person payments. For example, at the Website of one such service, registered users canenter a password, the email address of theperson they wish to pay, and the amount.The payment is either charged to their creditcard or deducted from their checkingaccount. The payee receives an emailexplaining how to collect the payment.

Section 10.4 Review


1. How are cashier’s checks and moneyorders comparable?

2. When is a traveler’s check signed andwhy?

3. How do the reasons for using a moneytransfer service and a wire transfer differ?

CONSUMER APPLICATIONSending Money Suppose you want to send$50 to a friend in another state. Investigatethree of the payment methods described inthis section and compare them in terms ofcost and convenience for you and yourfriend. Which would you choose and why?

1. How do banks make a profit even though theypay depositors interest? (10.1)

2. Choose two types of financial institutions andexplain how they differ. (10.1)

3. What would you want to know when choosinga financial institution? (10.1)

4. What is an electronic funds transfer? Howcan you initiate an EFT? (10.2)

5. What is the purpose of a PIN? (10.2) 6. Give an advantage and a disadvantage of using

a debit card. (10.2)7. Provide an example of an automated fund

transfer. Explain guidelines for setting up thetransfer. (10.2)

8. What protection does the Electronic FundTransfer Act provide? (10.2)

9. Why can a canceled check be offered as proofthat you have paid a bill? (10.3)

10. What is an overdraft? Why should you con-sider having overdraft protection? (10.3)

11. Give two reasons for having a checkingaccount. (10.3)

12. Why must you fill out a signature card whenyou open a checking account? (10.3)

13. Why should you carefully check outstandingtransactions when you reconcile your account?(10.3)

14. How can you pay a bill with a money order?(10.4)

15. Why are traveler’s checks useful? (10.4)16. Explain how to use a prepaid card. (10.4)17. What are two advantages of online payment

services? (10.4)

C H A P T E R S U M M A R Y

•Financial institutions offer varied moneymanagement services. To choose a financialinstitution, compare services, benefits, andcosts. (10.1)

•Electronic banking provides self-service andautomatic transactions. (10.2)

•Compare checking accounts to find the serv-ices you need for the lowest fees. Manage anaccount by keeping accurate records and anadequate balance. (10.3)

•Several payment methods are alternatives to personal checks or cash. The paymentmethod used may depend on fees and convenience. (10.4)

At Your Service: Jeremy’s bank offers anarray of conveniences and services: ATMs,debit cards, online banking, automatedtransfers, overdraft protection, and more.“Why not take advantage of them all?” hewonders. What factors should Jeremy con-sider before enrolling in each service? (10.2)


4. Payment Comparisons: Compare paying billswith checks and with money orders. What arethe advantages of each? (10.3, 10.4)

5. Taking Action: Explain what you would do ifyou discover that each of the following is miss-ing or has been stolen: a) ATM card; b) check-book; c) traveler’s checks. (10.2, 10.3, 10.4)

• Family: Discuss with your family howthey selected their current financial insti-tution(s). What top three considerationsaffected their decision? How would youchoose a financial institution? (10.1)

• Community: When you write a check,some businesses can tell immediatelywhether your account has the money tocover it. Some businesses even processand return checks at the time you makea purchase. Do any businesses in yourcommunity handle checks in these ways?Investigate and report to the class. (10.3)

Review & Activities • 259

1. Analyzing Economic Concepts: The FDICwas created in 1933. Why do you think it wasstarted at that time? (10.1)

2. Determining Cause and Effect: Suppose achecking account is never reconciled. Howmight this affect the person’s financial situa-tion? (10.3)

3. Applying Knowledge: Identify two situationsin which you might use each of these services:prepaid card, certified check, cashier’s check,money order, traveler’s check, and moneytransfer service. (10.4)

1. Banking Role-Plays: With a partner, role-playone of these situations: a) A banker describesthree checking account options and how toopen an account to a customer, while the cus-tomr comments on benefits and drawbacks.b) One person helps another learn how elec-

tronic banking works. (10.2, 10.3)2. Check 21: Check 21 is a federal law that lets

banks handle more checks electronically, mak-ing check processing faster, more efficient, andless expensive. Learn about this law and reporton its impact. (10.3)

3. Reconciling Statements: Reconcile the check-book balance with the bank balance, using thedata shown. (10.3)Bank statement closing balance: $223.56Checkbook balance: $127.47Outstanding checks: $37.23, $8.72, $21.68,$25.16, $6.60Service charge: $3.30

TYPES OF FINANCIAL

Documents

Transcript of TYPES OF FINANCIAL