banks and profit banking and financial services. “copyright and terms of service copyright ©...

Banks and Profit

Banking and Financial Services

“Copyright and Terms of Service

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2Copyright © Texas Education Agency, 2014. All rights reserved.

How Banks Make Money

Loans

Investments

Fees

Credit cards


Loans

• Interest – a fee paid for the use of money

• Largest amount of income for banks

• Amount of interest determined by:• Borrower credit• Market rates

4

The higher the credit rating . . . the lower the interest rate

The lower the credit rating . . . the higher the interest rate

Copyright © Texas Education Agency, 2014. All rights reserved.

Investments

Short-term-one year or

less

Medium term-from one to ten

years

Long-term-

longer than ten years


Short-term Investments

• Mature in less than one year

• Treasury bills most common• Issued by the United States Treasury

• Very low risk

• Typically issued in terms such as one-, three-, and six-month terms as well as one year


Medium-term Investments

• Can be one to ten years

• Treasury notes are most common

• Interest typically paid every six months


Long-term Investments

• Held for at least ten years

• Bonds are most common• Savings bonds

• Earn interest up to thirty years• May not be transferred to another person• Interest paid at maturity

• Treasury bonds• Pays interest every six months• Can be up to thirty years as well• May be transferred


Income from Fees

Checking account fees ATM fees Safe deposit

box fees

Credit card fees

Other types of fees


Checking Account Fees

• Monthly maintenance, or service, fees

• NSF (Insufficient funds) fees for checks and debit cards

• Stop payment fees


ATM Fees

• ATM = Automated Teller Machine – a machine that computerizes and provides self-service banking

• Fees for using another bank’s ATM

• Fees for some basic banking services


Safe Deposit Box Fees

• Fees to lease a box

• Fee for lost keys

• Fee for late box rental payments


Credit Card Fees

• Can be annual fee to have the card

• Fee for late payments

• Fees for going over your credit limit

• Cash advance fees


Other Bank Fees

• Wire transfer fees

• Online banking fees

• Fees for money orders

• Notary fees


Income from Insurance Services

Life

Property & Liability

Medical

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Premiums – amounts paid on a regular basis to ‘purchase’ insurance

Gramm-Leach-Bliley Act of 1999 – allows banks to sell insurance as well as investment products


Life Insurance

• Insurance protects against risk – the possibility of loss

• Beneficiary – someone who receives a financial benefit from a life insurance policy upon the death of the insured person

• Types of life insurance:• Credit life – insurance that pays off loan balances upon the death of the insured

person

• Mortgage life – similar to credit life but applies to paying off a mortgage loan as opposed to other loans


Property and Liability Insurance

• Property (and casualty) insurance – insurance that covers the cost of property that may be lost or damaged

• Liability insurance – insurance that covers expenses incurred as the result of a loss such as medical (for an injured person) and legal expenses

• Two most popular types:• Automobile

• Homeowner’s

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Liability – covers property and injuries of another person if there is an accidentCollision – damage to your own vehicleComprehensive – covers other losses such as theft, tree falling on your car, etc.

Covers loss or damage to home and contents, could be from hail, fire, flood and other perils


Property and Liability Insurance

• For businesses:• Property covers damage or loss to property of a business especially property that

can affect the income of a business

• Liability again covers expenses that are related to legal issues of a loss such as a lawsuit, which can affect the value of a business


Medical Insurance

• Two most common types offered by banks:• Health – costs covered as a result of an accident or illness• Disability – replaces a portion of someone’s income if they are unable

to work as a result of accident, illness, or injury. Cost depends upon:• the percentage of income will be replaced, for example, the higher the % the

higher the premium• How long after the accident, illness, or injury the replacement income begins, for

example, the sooner the payments start, the higher the premium


Trust Services

Individuals

Businesses

Investment Banking Services

International Banking


What are Trust Services?

• Trust – legal documents stating how a client’s assets are to be handled

• Trustee – the person who receives fees for managing a client’s assets

• Provided mostly by larger banks due to the expertise required


Individuals

• Retirement planning• 401 (k) – a retirement plan that is employer-sponsored but can be rolled over into a

retirement plan offered by a bank

• Estate management:• Estate – the assets (property and possessions) of an individual

• Planning an estate:• Preparing wills• Determining how assets will be transferred upon a client’s death

• Settling an estate:• Determining value of assets• Paying taxes and other debts of an estate• Distributing assets


Description of Business Services

Type of Service Examples

Accounting Payroll, accounts payables and receivables, cash management services

Capital Purchases of major capital assets, financing of those assets

Collections Armored car services, deposits, electronic funds transfers

Credit Card Issuing credit cards, conducting credit services

Information Wire tranfers, data and reports necessary for businesses


Investment Banking Services

• Underwriting services• Investment underwriting – when a bank acts as an intermediary between a

company issuing new stock and the public who may want to buy shares

• Spread – the difference between what the bank pays for the company’s shares and what they sell the shares for to the public

• Mergers and Acquisitions• Professionals assist in negotiating terms and determining value of businesses for a

fee

• Merger – when two or more companies combine to form a new company

• Acquisition – when a company purchases or takes control of another company, usually through purchasing the stock in the company


International Banking

• Services of banks that do business internationally

• Services of foreign banks that conduct business in the U. S.

• Edge Act corporations – investment banks chartered by the Federal Reserve to perform certain international banking activities

• Correspondent banks – an agent of a U. S. bank operating in another country


Independent Practice Assignments• Bank Fees Comparison Diagram Assignment #1 – Students will research, either online, or by

checking with local banks in their area, all of the fees that at least 3 banks charge their customers. They will then create a Venn diagram where each of the banks are in a circle, the fees that are the exact same for all three banks are in the middle overlapping section, any fees that are the same between two banks are in the overlapping section for the two banks, and fees that are not the same for any of the banks will remain in that particular bank’s circle.

• International Banking Services Assignment #2 – Students will research, either online, or by checking with local banks, to see what international banking services they offer. They will create a flyer that displays all of the services offered, for example, currency conversion, traveler’s checks, and other services. Include appropriate graphics. They should include this information for one bank as well as the costs for the services.

• Student Account Assignment #3 – Using the following web site, http://www.consumerfinance.gov/blog/student-banking-101/ or they can go to any bank’s web site and locate information for student accounts. In pairs students will review the different banking services available to students. They will then create a ‘commercial’ (either a skit or video), intended to market student accounts to the class, that states at least 5 features of the accounts in a creative way. 27Copyright © Texas Education Agency, 2014. All rights reserved.

http://www.consumerfinance.gov/blog/student-banking-101/

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