Trends in Banking

Electronic Banking

Electronic banking includes such services as ATMs, direct deposits, electronic fund transfers, and online banking.

Learning Objectives

Discuss common electronic banking features and services

Key Takeaways

Key Points

  • ATMs can be used to to make a withdrawal, make a deposit, make a loan payment, transfer money from one account to another, or check your account balance.
  • Direct deposit makes it possible for you to have your money electronically added to your checking account every payday.
  • Electronic funds transfer (EFT) is a service that allows a bank to transfer large amounts of money to another bank by sending an electronic message.

Key Terms

  • overdraft: The act of overdrawing a bank account.

Electronic Banking

The emergence of new technologies has turned banking into a round-the-clock business. Automated teller machines (ATMs) now make it possible for you to do much of your banking whenever you choose. ATMs are computers that are much like limited-service bank branches. You can use them to make a withdrawal, make a deposit, make a loan payment, transfer money from one account to another, or check your account balance. In many cases, automated teller machines of different banks are linked together in networks so you can use them when you travel to a different town, another state, or even another country. All you need is a plastic card from your bank and your own password.

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ATM: ATMs are computers that are much like limited-service bank branches. You can use them to make a withdrawal, make a deposit, make a loan payment, transfer money from one account to another, or check your account balance.

Another electronic banking service available today is direct deposit. This service makes it possible for you to have your money electronically added to your checking account every payday. Instead of receiving a paycheck, you receive a statement that tells you your money has been deposited in your account. Direct deposit is popular among people who receive Social Security checks or pension checks because it saves them the trouble of travelling to the bank to deposit them in person.

Electronic funds transfer (EFT) is a service that allows a bank to transfer large amounts of money to another bank by sending an electronic message. Electronic transfers take only an instant. An electronic message instructs a computer to deduct a certain amount of money from one bank account and then add the same amount to another bank account. The message is sent, and the appropriate amount is transferred. No cash or paper changes hands, but money is transferred just the same.

Possibly the most popular advance in banking through the use of technology is online banking. The emergence of online banking has ushered in a new era of convenience and security in managing money. The service is available seven days a week, 24 hours a day. The system gives you the freedom to choose your own banking hours, giving you greater control of your finances. It’s secure, fast, and easy to use. Online banking allows you to check your balance, pay your bills, view statements, transfer funds, view transaction history, and much more. Online banking services include:

  • Getting provisional statements
  • Making account payments
  • Making a once-off payment
  • Setting up future-dated payments
  • Setting up repeat payments
  • Making inter-account transfers
  • Stopping debit orders and checks
  • Increasing and decreasing overdraft limits

Banks have found online banking so much cheaper than traditional in-bank methods that some have encouraged depositors and other customers to bank from home or via machines by charging them fees for the privilege of talking to a teller! Some banks are completely virtual and have no physical branches. So-called click-and-mortar, or hybrid, banks appear more viable than completely virtual banks at present.

Further technological advances have led to the creation of automated banking machines (ABMs). ABMs are combinations of ATMs, web sites, and dedicated customer service telephone lines that allow customers to make deposits, transfer funds between accounts, or engage in even more sophisticated banking transactions without stepping foot in the bank.

Online Direct Banks

An online direct bank has no physical branches, relying only on internet, phone, and mail services and often delivering better rates to customers.

Learning Objectives

Describe direct banking and the drivers behind its success

Key Takeaways

Key Points

  • By eliminating the costs associated with bank branches, direct banks may offer higher interest rates and lower service charges on their products than their traditional competitors.
  • The commercialization of the Internet in the early 1990s was the biggest driver in the creation of direct banking models.
  • The initial success of internet banking services provided by traditional banks led to the development of internet-only banks or “virtual banks”.

Key Terms

  • automated teller machine: A device that provides bank customers with cash withdrawal and other services without the need for a bank teller.

Direct Banking

A direct bank is a bank without any branch network. It offers its financial services by:

  • Telephone banking
  • Online banking
  • Automated teller machines (often through interbank network alliances)
  • Mail banking
  • Or mobile banking

By eliminating the costs associated with bank branches, direct banks may offer higher interest rates and lower service charges on their products than their traditional competitors. Direct banks were originally based on providing banking services via telephone. One of the world’s first fully functional direct banks was First Direct, which launched in the United Kingdom on October 1, 1989. First Direct pioneered the concepts of no branches and 24-hour service from a call center.

The commercialization of the Internet in the early 1990s was the biggest driver in the creation of direct banking models. As the Internet became more generally accessible, traditional banks began to realize their potential to deliver services to their customers while reducing long-term operational costs. Upon realizing this, traditional banks began to offer limited online banking services. The initial success of internet banking services provided by traditional banks led to the development of internet-only banks or “virtual banks. ” These banks were designed without a traditional banking infrastructure, a cost-saving feature that allowed many of them to offer savings accounts with higher interest rates and loans with lower interest rates than most traditional banks.

One of the first fully functional direct banks in the United States was the Security First Network Bank (SFNB). Based in Atlanta, it was the first direct bank to be insured by the Federal Deposit Insurance Corporation (FDIC). Though SFNB did not make much profit in its initial years, it demonstrated that the concept of direct banking could work.

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Online Direct Banking: A list of services offered by the First Direct Bank.

Personal Financial Management

Personal finance is the application of the principles of finance to the monetary decisions of an individual or family.

Learning Objectives

Give examples of personal financial management

Key Takeaways

Key Points

  • Having rules to dictate when and how much money you set aside for personal savings will help you avoid over-consumption.
  • Personal savings should always be kept in the form of liquid assets. This way, should you befall some kind of tragedy, your money will be readily available.
  • With all of the financial, investment, and insurance products available to consumers, it is worthwhile to learn about your options in order to find a personal financial management strategy that fits your goals and risk preferences.

Key Terms

  • insurance: A means of indemnity against a future occurrence of an uncertain event.
  • mutual funds: A mutual fund is a type of professionally-managed collective investment vehicle that pools money from many investors to purchase securities.
  • finance: the science of management of money and other assets

Personal Finance Defined

Personal finance is the application of the principles of finance to the monetary decisions of an individual or family. It addresses the ways in which individuals or families obtain, budget, save, and spend monetary resources over time, taking into account various financial risks and future life events. When planning personal finances there are many financial products one might consider: such as banking products (checking, savings accounts, credit cards, and consumer loans ), investment products (stock market, bonds, and mutual funds ), and insurance products (life insurance, health insurance, and disability insurance). One might also consider individual or employer sponsored retirement plans, social security benefits, and income tax management.

Personal Finance Strategies

Here are ways to start saving more:

Have an emergency savings account. This is an account you can tap into if you lose your job or have major, unforeseen expenses. “Emergency savings will help ensure that you don’t have to borrow from your retirement nest egg or take out additional loans that would push you into debt,” said Luke W. Reynolds, Chief of the FDIC ‘s Community Affairs Outreach Section. A general rule of thumb is to have enough money in this “rainy day” fund equal to at least two months of living expenses. If your employment outlook is especially uncertain, consider setting aside enough to cover six or more months of anticipated expenses.

Also, keep your emergency savings in an account that will be fairly liquid — such as a bank savings account, money market account, or a short-term certificate of deposit (CD) — so you can withdraw the money relatively quickly, if necessary. “You should probably also keep your emergency money in a deposit account, where your funds are protected by federal deposit insurance, as opposed to stocks or stock or bond mutual funds that can lose value in a volatile market,” said Mary Bass, an FDIC Senior Community Affairs Specialist. Try to save money for long-term goals, such as your retirement. If your employer matches a portion of your payroll contributions to a tax-advantaged retirement savings plan, “not participating means you are passing up free money and perhaps losing out on a valuable tax break,” added Reynolds.

Pay yourself first. That means each month, before you’re tempted to spend money, commit to putting a good bit of it into a savings account. You can write out a check to be deposited into your savings account, but it’s much easier to arrange with your bank to automatically transfer a certain amount from your paycheck or your checking account into your savings. And as you pay your bills, your mortgage and other obligations, take satisfaction in knowing that some of your hard-earned dollars are already saved for you!

Start small. “By consistently saving small amounts, even $25 out of every paycheck, your savings account will grow and you will be motivated to try to save more,” said Reynolds. “Even that spare change you put once a month into a bank savings account can add up faster than you think. ”

Review your existing accounts and comparison shop for the best deals. Look at what is being offered by your bank and a few competitors. The idea is to make sure the interest rates are competitive and that the fees and features are appropriate for how you use each account. For example, if your money is sitting in a low-rate checking or savings account, consider moving it to a higher-yielding account, perhaps a CD where the earnings can get an extra boost. Turn a debt payment into a deposit. If you pay off a debt, such as the outstanding balance on a credit card, or if you make that last loan payment on your car, put that money to work as part of your savings.

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Compound Interest: The chart to the left shows how compound interest at various rates would increase Lynne’s savings compared with simply putting the money in a shoebox. This is compound interest that you earn. And as you can see from an investment, compounding has a greater effect after the investment and interest have increased over a longer period.