Banking
Banks serve as intermediaries between primary lenders, or depositors,
and the ultimate borrowers. Commercial banks, savings and loan
associations, savings banks, credit unions, and money market funds
compete with nearly identical products and services. The articles
included herein relate to banking and the financial system.
How to Find the Best Checking Account for Students
With so many financial institutions offering checking accounts, choosing one may be confusing. This Buzzle article will tell you how to find the best checking account for students.
With so many financial institutions offering checking accounts, choosing one may be confusing. This Buzzle article will tell you how to find the best checking account for students.
Students need to get a checking account to pay their bills and make
payment for rent, food, etc. With so many offers of checking accounts
from various banks, choosing the best checking account can be confusing
for students. Most students are new at managing their finances, and
often end up getting the wrong kind of accounts. There are a few who
like to play it safe and prefer to go with their parents' banks, as
transferring money is faster and convenient. However, don't just fall
for a bank because it is giving you free gifts like iPods. You must
check the services they offer and the fees they charge for the same. You
may be surprised to find a better option that will prove to be far more
financially beneficial for you. Here are a few useful tips to help you
find the best checking account.
Compare Options
You must never settle for the first bank that approaches you for a checking account. You must conduct a comparative analysis of all the options and decide which one is best suited for you. You can visit findthebest.com to compare rates, and search for an appropriate option. You must look at the various services, features, and support offered by the banks, and their compatibility with your student lifestyle before deciding which option is suitable for you. You can also check online reviews of checking accounts to know about the recommendations of experts.
Minimum Balance
The good news is that many banks will allow you to get such accounts at very low prices. According to bankrate.com, some banks may insist that you pay $50 worth of initial opening balance and have no minimum balance requirement later on.
Monthly Fees
Many banks waive off the monthly service fees on checking accounts for students. This is to expand their customer base and keep them from moving to other competitors. Hence, you should inquire about the monthly fees levied on your account before you start an account with a bank.
Overdraft Fees
As students are in constant need for cash, it may so happen that your balance may drop drastically beyond the minimum requirement. Find a bank that does not charge you with any penalty fees for this or has fees that are relatively on the lower side. Many banks prefer not to charge fees for the first time if the balance drops beyond a certain limit; however, if your account is overdrawn, they will definitely charge a certain amount. This fee can be as high as $35. Such fees can often bite away a huge chunk of your money.
Connecting Accounts
If your account gets overdrawn owing to non-sufficient funds, you tend to attract a huge fine. To avoid this, some banks offer a facility where your checking account is connected to a backup account. If the balance in your checking account dips beyond a limit, it automatically transfers money from your backup account to avoid penalty fees.
Know What's Free and What's Not
Banks understand that students can become important permanent customers; hence, they offer many incentives and benefits to them. To attract as many student customers as they can, banks offer various free schemes to students like an interest-free overdraft facility, free debit card without any charges, etc. However, do remember that the bank may charge you for international transactions, out-of-network ATM usage, exceeding your overdraft limit, etc. You will also have to know about the other fees which will be charged by your banks. This may include online banking fees, transfer of funds between accounts, bill payment charges, etc. You must know exactly what is free and what is not before you get the checking account.
Proximity
According to a report in nerdwallet.com, an FDIC survey observed that 46% of respondents said that the location of their financial institution played an important role in selecting a checking account. Many students prefer to go for banks that have ATMs located on their campus so that they can conveniently withdraw money. However, this should not be a yardstick to measure the right checking account at all. There are many banks today that do not levy extra fees for using out-of-network ATMs and also prove beneficial for other offers that can help you save a lot of money in terms of fees. Also, they may offer better rates of interest and features like alerts when the balance goes low, online bill payments and transactions, etc. However, if you do find a brick and mortar bank which has good offers within the vicinity of your campus, go for it.
Mobile Banking
Students often live in one place during their course term and travel to other cities for their internships or part-time jobs. This means that they may not necessarily be close to a branch of their bank. Many students today prefer to use their smartphones for conducting bank transactions. Hence, they should opt for a checking account that will have easy electronic access and flexibility for processing transactions through mobile and Internet banking.
Transferring Money
In most cases, checking accounts do not offer an attractive rate of interest. Hence, students who want to set aside some money, should ideally transfer their funds to the savings accounts. Find a checking account that will execute your standing instructions and transfer a certain amount to your savings account. This will help get a better rate of interest.
Some Tips
• Don't opt for a general checking account; go for one created specially for students to gain maximum benefits.
• Refrain from handing over a post-dated check to someone, as you may not necessarily have the amount in your account at the time of encashment.
• Seek a bank that allows you to deposit checks through ATM and smartphones.
• As checking accounts are transactional accounts and highly liquid, it is important to find one that will offer a considerable amount of interest.
• Endorse a check only when you are ready to deposit it.
• Never share your pin numbers with others.
Compare Options
You must never settle for the first bank that approaches you for a checking account. You must conduct a comparative analysis of all the options and decide which one is best suited for you. You can visit findthebest.com to compare rates, and search for an appropriate option. You must look at the various services, features, and support offered by the banks, and their compatibility with your student lifestyle before deciding which option is suitable for you. You can also check online reviews of checking accounts to know about the recommendations of experts.
Minimum Balance
The good news is that many banks will allow you to get such accounts at very low prices. According to bankrate.com, some banks may insist that you pay $50 worth of initial opening balance and have no minimum balance requirement later on.
Monthly Fees
Many banks waive off the monthly service fees on checking accounts for students. This is to expand their customer base and keep them from moving to other competitors. Hence, you should inquire about the monthly fees levied on your account before you start an account with a bank.
Overdraft Fees
As students are in constant need for cash, it may so happen that your balance may drop drastically beyond the minimum requirement. Find a bank that does not charge you with any penalty fees for this or has fees that are relatively on the lower side. Many banks prefer not to charge fees for the first time if the balance drops beyond a certain limit; however, if your account is overdrawn, they will definitely charge a certain amount. This fee can be as high as $35. Such fees can often bite away a huge chunk of your money.
Connecting Accounts
If your account gets overdrawn owing to non-sufficient funds, you tend to attract a huge fine. To avoid this, some banks offer a facility where your checking account is connected to a backup account. If the balance in your checking account dips beyond a limit, it automatically transfers money from your backup account to avoid penalty fees.
Know What's Free and What's Not
Banks understand that students can become important permanent customers; hence, they offer many incentives and benefits to them. To attract as many student customers as they can, banks offer various free schemes to students like an interest-free overdraft facility, free debit card without any charges, etc. However, do remember that the bank may charge you for international transactions, out-of-network ATM usage, exceeding your overdraft limit, etc. You will also have to know about the other fees which will be charged by your banks. This may include online banking fees, transfer of funds between accounts, bill payment charges, etc. You must know exactly what is free and what is not before you get the checking account.
Proximity
According to a report in nerdwallet.com, an FDIC survey observed that 46% of respondents said that the location of their financial institution played an important role in selecting a checking account. Many students prefer to go for banks that have ATMs located on their campus so that they can conveniently withdraw money. However, this should not be a yardstick to measure the right checking account at all. There are many banks today that do not levy extra fees for using out-of-network ATMs and also prove beneficial for other offers that can help you save a lot of money in terms of fees. Also, they may offer better rates of interest and features like alerts when the balance goes low, online bill payments and transactions, etc. However, if you do find a brick and mortar bank which has good offers within the vicinity of your campus, go for it.
Mobile Banking
Students often live in one place during their course term and travel to other cities for their internships or part-time jobs. This means that they may not necessarily be close to a branch of their bank. Many students today prefer to use their smartphones for conducting bank transactions. Hence, they should opt for a checking account that will have easy electronic access and flexibility for processing transactions through mobile and Internet banking.
Transferring Money
In most cases, checking accounts do not offer an attractive rate of interest. Hence, students who want to set aside some money, should ideally transfer their funds to the savings accounts. Find a checking account that will execute your standing instructions and transfer a certain amount to your savings account. This will help get a better rate of interest.
Some Tips
• Don't opt for a general checking account; go for one created specially for students to gain maximum benefits.
• Refrain from handing over a post-dated check to someone, as you may not necessarily have the amount in your account at the time of encashment.
• Seek a bank that allows you to deposit checks through ATM and smartphones.
• As checking accounts are transactional accounts and highly liquid, it is important to find one that will offer a considerable amount of interest.
• Endorse a check only when you are ready to deposit it.
• Never share your pin numbers with others.
How to Choose the Right Checking Account
A checking account helps you in holding the cash reserves required for your day-to-day transactions and monthly payment of bills. Hence, it becomes essential to choose the right account. This Buzzle article tells you how to choose one.
A checking account helps you in holding the cash reserves required for your day-to-day transactions and monthly payment of bills. Hence, it becomes essential to choose the right account. This Buzzle article tells you how to choose one.
Gone are the days when people were heavily dependent on one bank
for all their banking needs like transactional accounts, savings
account, debit/credit cards, CDs, loans/mortgages, etc. Today's customer
has learned that it is not necessary that one would end up getting
maximum benefits from the same bank. He has learned to do some homework
to find the best bank and deal which will suit his requirements. If you
are looking for an account which you can use to pay your bills or
expenses on a regular basis, you should consider going in for a checking
account. It is insured by the FDIC for an amount up to $100,000. Most
of the small and large brick-and-mortar banks offer this facility. You
can also check with online banks and credit unions for getting an
account. However, if you do not go for the right account, you may end up
paying a lot as your fees for limited number of transactions. You
should also get an account which will allow you to earn some interest on
your balance. Here are a few factors that you can look into.
Minimum Balance
Try to judge how much of minimum balance you will be able to afford to maintain in a checking account. List down the banks who will allow you to retain that kind of low balance in your account. Remember that the bank will make money if you have a higher balance in your account. If you do not have the same or cannot abide by their minimum balance requirement, you may have to shell out a lot of money as bank charges every month. Hence, conduct research to find an account with a bank which will offer a minimum balance condition that you will be able to afford easily. Explore the option of online banks instead of the brick-and-mortar ones as many of them do not charge extra fees if your balance dips below the minimum limit.
Number of Transactions
One of the most important aspects is to get your monthly bills paid, or business transactions done through this account. However, check with the banks whether they have a limit on such transactions. Many banks restrict the number of debit transactions that happen within a month. Also, the number of checks issued from these accounts and bills paid may also be limited. This defeats the very purpose of going in for a checking account as one does not earn much interest from it and treats it as an expenditure transaction account. If you are a frequent traveler, verify that the bank is not going to charge you with heavy out-of-network ATM fees. Ensure that you open one with a bank who has zero or minimum of such restrictions.
Compare Them
One of the easiest ways to choose the right account is to list down the different types of checking accounts and the features they offer. Now, compare them with your requirements. You may also conduct a cost-benefit analysis and choose an account which will give maximum benefits at minimum charges/fees. There are many online websites like Bankrate, FindTheBest, FindABetterBank, etc., which will allow you to compare the features of accounts of different banks to provide you the most suitable option. Most of the online and offline bank websites offer tools where you fill in your personal information and requirement for a checking account, and the bank will recommend the best ones to you.
Overdraft Facility
Just imagine that due to a business emergency, you have to pay extra money to your debtors. However, your account does not have the amount required for this. Don't worry, your check will not bounce, and you can still draw a check for a higher amount. These days, banks offer overdraft facility on your account and allow you to withdraw more than your account balance. Hence, it is essential that you sign up for the bank's overdraft feature. All this does not come for free; the bank will charge you a certain fee on the overdraft amount. Some accounts also offer 'overdraft protection'; however, the bank charges interest on them. However, you may end up paying a high premium if you avail an overdraft for a higher amount. Also, check if your bank is allowing you to link your checking account to your credit card for avoiding the overdraft fee.
Earning Interest
Contrary to popular belief that checking account does not earn any kind of interest, keeping a good amount of balance can actually earn you some interest. Of course, when compared with a savings account, one may feel that the interest rates are way too less. However, considering that the intention of this account is not for gaining money, any interest credited can be a good financial gain. Some local banks and credit unions offer higher interest rates as rewards to their customers. All you have to do is maintain a high balance for availing these benefits.
Accessibility
When you are traveling within the country or abroad, you may want a branch of your bank or ATM easily accessible to you. Hence, many end up going for an account with a bank that already takes care of requirements and has many branches or ATM centers. This may lead you to save a lot of money on out-of-network ATM transactions. However, beware that banks with a wide network may not necessarily offer the best deals and rate on interests. Also, they may levy a heavy amount of service charges. Hence, conduct research for a bank that will have a considerable presence and will offer you higher interest rates. Also, look for banks which have roped in retailers and gas stations for ATM partnerships.
ATM Fee Reimbursement
You will be charged by other banks for accessing an ATM which is not within the network of the bank. However, there are many online banks which reimburse you the fees charged by other banks. Hence, you can look at an online bank option for your account as you will end up saving on the out-of-network-ATM charges. You can also search for no-surcharge on ATMs or no-fee ATM withdrawals.
No-fee Account
Once you zero in on a bank, find out the total cost the bank will be charging you. Remember that you can get an account without the monthly fees and surcharges. One option to avail this benefit is getting your paycheck directly deposited into the account for payment of bills, expenses, etc. This will ensure that a certain amount will always remain in your account. This makes the bank believe that you are interested in becoming a long-term customer. Even if you opt for keeping a minimum balance or having a certificate of deposit, the bank may waive off the charges. Another method to avail this benefit includes, opening of savings account with the same bank. There are many banks who not only waive off the fees but also the entire cost. This may save you a certain amount of money. Hence, ensure that you get an account from the right bank.
Fees
Banks charge various fees in order to make profit and for covering their operational cost. Some banks may charge fees for online banking, debit card fees, overdraft fees, monthly maintenance fees, etc. If you are a student or someone with a low-income, you are entitled to opt for a no-frills account. This means that no fees will be charged for your personal checks and allied services. Some banks also qualify senior citizens and low-income applicants for waiving off the service and ATM fees on a monthly basis. Also, find a bank that will offer free check printing and will not charge you on a per-check transaction basis. Research for a checking account with a bank that will offer more percentage of interest and charge lesser amount of fees.
Minimum Balance
Try to judge how much of minimum balance you will be able to afford to maintain in a checking account. List down the banks who will allow you to retain that kind of low balance in your account. Remember that the bank will make money if you have a higher balance in your account. If you do not have the same or cannot abide by their minimum balance requirement, you may have to shell out a lot of money as bank charges every month. Hence, conduct research to find an account with a bank which will offer a minimum balance condition that you will be able to afford easily. Explore the option of online banks instead of the brick-and-mortar ones as many of them do not charge extra fees if your balance dips below the minimum limit.
Number of Transactions
One of the most important aspects is to get your monthly bills paid, or business transactions done through this account. However, check with the banks whether they have a limit on such transactions. Many banks restrict the number of debit transactions that happen within a month. Also, the number of checks issued from these accounts and bills paid may also be limited. This defeats the very purpose of going in for a checking account as one does not earn much interest from it and treats it as an expenditure transaction account. If you are a frequent traveler, verify that the bank is not going to charge you with heavy out-of-network ATM fees. Ensure that you open one with a bank who has zero or minimum of such restrictions.
Compare Them
One of the easiest ways to choose the right account is to list down the different types of checking accounts and the features they offer. Now, compare them with your requirements. You may also conduct a cost-benefit analysis and choose an account which will give maximum benefits at minimum charges/fees. There are many online websites like Bankrate, FindTheBest, FindABetterBank, etc., which will allow you to compare the features of accounts of different banks to provide you the most suitable option. Most of the online and offline bank websites offer tools where you fill in your personal information and requirement for a checking account, and the bank will recommend the best ones to you.
Overdraft Facility
Just imagine that due to a business emergency, you have to pay extra money to your debtors. However, your account does not have the amount required for this. Don't worry, your check will not bounce, and you can still draw a check for a higher amount. These days, banks offer overdraft facility on your account and allow you to withdraw more than your account balance. Hence, it is essential that you sign up for the bank's overdraft feature. All this does not come for free; the bank will charge you a certain fee on the overdraft amount. Some accounts also offer 'overdraft protection'; however, the bank charges interest on them. However, you may end up paying a high premium if you avail an overdraft for a higher amount. Also, check if your bank is allowing you to link your checking account to your credit card for avoiding the overdraft fee.
Earning Interest
Contrary to popular belief that checking account does not earn any kind of interest, keeping a good amount of balance can actually earn you some interest. Of course, when compared with a savings account, one may feel that the interest rates are way too less. However, considering that the intention of this account is not for gaining money, any interest credited can be a good financial gain. Some local banks and credit unions offer higher interest rates as rewards to their customers. All you have to do is maintain a high balance for availing these benefits.
Accessibility
When you are traveling within the country or abroad, you may want a branch of your bank or ATM easily accessible to you. Hence, many end up going for an account with a bank that already takes care of requirements and has many branches or ATM centers. This may lead you to save a lot of money on out-of-network ATM transactions. However, beware that banks with a wide network may not necessarily offer the best deals and rate on interests. Also, they may levy a heavy amount of service charges. Hence, conduct research for a bank that will have a considerable presence and will offer you higher interest rates. Also, look for banks which have roped in retailers and gas stations for ATM partnerships.
ATM Fee Reimbursement
You will be charged by other banks for accessing an ATM which is not within the network of the bank. However, there are many online banks which reimburse you the fees charged by other banks. Hence, you can look at an online bank option for your account as you will end up saving on the out-of-network-ATM charges. You can also search for no-surcharge on ATMs or no-fee ATM withdrawals.
No-fee Account
Once you zero in on a bank, find out the total cost the bank will be charging you. Remember that you can get an account without the monthly fees and surcharges. One option to avail this benefit is getting your paycheck directly deposited into the account for payment of bills, expenses, etc. This will ensure that a certain amount will always remain in your account. This makes the bank believe that you are interested in becoming a long-term customer. Even if you opt for keeping a minimum balance or having a certificate of deposit, the bank may waive off the charges. Another method to avail this benefit includes, opening of savings account with the same bank. There are many banks who not only waive off the fees but also the entire cost. This may save you a certain amount of money. Hence, ensure that you get an account from the right bank.
Fees
Banks charge various fees in order to make profit and for covering their operational cost. Some banks may charge fees for online banking, debit card fees, overdraft fees, monthly maintenance fees, etc. If you are a student or someone with a low-income, you are entitled to opt for a no-frills account. This means that no fees will be charged for your personal checks and allied services. Some banks also qualify senior citizens and low-income applicants for waiving off the service and ATM fees on a monthly basis. Also, find a bank that will offer free check printing and will not charge you on a per-check transaction basis. Research for a checking account with a bank that will offer more percentage of interest and charge lesser amount of fees.
Steps to Account Reconciliation
Account reconciliation is the process of comparing the debit and credit balances of an account, and of verifying or tallying the account. Here, we have provided four easy steps for account reconciliation which will help you compare statements of transactions and accounting records so that discrepancies (if any) are corrected.
The process of account reconciliation is used when the transactions
are recorded using the double entry system. In a double entry
bookkeeping system, a single transaction has effects of debit and
credit. These two effects can be cross-confirmed by tallying the
account. Owing to this, all the accounts, if recorded properly, have
balancing figures at the end of the month or year (or whenever the
account closes).
For carrying out the verification and comparison of your accounting records and of the bank statement or credit and debit card statements, it is important that you collect all your deposit and payment slips or receipts. On comparison, you will come to know whether the transactions on your slips tally with the bank statement or not. The most important thing that people tend to forget is including deposits or payments that have been made but not cleared, towards the end of the month.
If you find that there are bank errors, deduct or add them to the ending balance. If your calculations do not tally with the bank statement, inform the bank about the mistake, so that the bank can prepare a reconciliation statement of its own. You may even have to omit a wrong entry for payment or add a posting which you may have forgotten. Inaccurate deposits and deductions need to be corrected. You may also check for bank charges like account handling fees. You will also have to add any kind of interest earned on the deposits.
What is Account Reconciliation?
Nowadays, this term mostly refers to what we know as bank reconciliation. The term account reconciliation has a deeper meaning. It refers to the tallying of two sets of transactions. For example, after you use your credit card, you receive a receipt that you stack away. After you receive the monthly bill from your credit card company, you compare it with your stack of receipts. This is known as account reconciliation and if the reconciliation is regarding your bank account, it is referred to as bank reconciliation. Reconciliation is done by companies and individuals alike. The only difference is that companies use accounting software for this purpose (considering the size of the transactions) while individuals need to do it manually.
The comparison of the two (accounting records and bank statement) is done in order to find the outstanding records and to correct errors. It is also carried out to find how many transactions went unrecorded in the previous accounting period.
What are the Steps for Account Reconciliation?
Step 1
First, gather all the relevant accounting information. This includes, updating your checkbook, getting a bank statement and gathering all your ATM withdrawal slips together.
Step 2
Jot down the last balancing figure from the bank statement. Deduct the bank charges from the balance of your bank account. Compare the deposit slips with your bank statement. If there are any checks (deposits) that have not been cleared or approved in the statement before the last day of the month, add the amounts to the balancing figure. You can also add to the balancing figure, any kind of interest that is due, but not received. This final balancing figure is also termed as the 'running' balance.
Step 3
In this step, start comparing your payment receipts with that of the bank statement. Compare the ATM withdrawal slips, the checks paid and the payments that are due but have not yet been passed by the bank. Take the sum total of all the amounts of the payments and withdrawals and subtract it from the running balance. Note down any monthly bills that are deducted directly from your bank account. Deduct the same from the running figure. For example, if your electricity bill is directly deducted from your bank account, then reduce its amount from your running balance. Once you are done with the deductions, the balance amount that you have should tally with the total balance in your bank statement.
Step 4
Make a comparison of the amounts in your check register and bank statement. If the balance of the bank statement and running figure does not tally, there is some error. Use a calculator and find out the error in the ending balance of the checkbook register, beginning from the end of the last month's statement. Next, confirm all the payments and withdrawals (those that have been cleared or not cleared). Use your payment and withdrawal slips, while doing so. You will come to know whether the transactions on your slips tally with the bank statement or not. If it is not tallying, re-check the amounts.
Example
If you are a beginner at account reconciliation, one of the simplest ways to tally the accounts is by tallying the check register balance figure with that in your bank statement every month. For this, make two columns; one will be the book column and the other will be the bank column. The book column will show the balance of your check register on the date present on the bank statement. In the bank column, write the balance it shows in your bank statement for that particular date. Following is an example of a bank account reconciliation.
Book Bank
January 31 Balance $2610.20 January 31 Balance $2760.60
Add: Interest Credited +$2.10 Less: OS ck #255 (Installment) -$150.20
Add: Refund (Grinder) +$50.10 Less: ATM withdrawal (January 30) -$100.00
Less: Adjusting Error #249 -$152.00 Less: OS ck #256 (Fees) -$10.00
Less: Bank Charges Debited -$10.00 ---
New Balance $2500.40 New Balance $2500.40
Tips
It is recommended that you prepare an account reconciliation statement every month. You will find it difficult to prepare one initially, however, with practice you will be able to master it. Here are some useful tips for making an account reconciliation statement.
✓ Always maintain a record of all your debit and credit transactions in your check register.
✓ There are chances that you record a payment of $15 as $51, for instance. Hence, be careful while writing the numbers.
✓ Check if you have mistakenly added a transaction twice.
✓ Check if you have mistakenly cleared any item or missed clearing an item.
✓ Whenever you visit the ATM, collect the printed slip of the transaction and put it aside safely. Continue collecting the printed slips for every transaction, till the end of the month.
✓ Collect the deposit slips of checks and stack them sequentially.
✓ You may also check if you have recorded a deposit as payment or vice versa.
✓ Whenever you hand out a check, make it a point to record it in the checkbook register (the one that is attached to your checkbook).
For carrying out the verification and comparison of your accounting records and of the bank statement or credit and debit card statements, it is important that you collect all your deposit and payment slips or receipts. On comparison, you will come to know whether the transactions on your slips tally with the bank statement or not. The most important thing that people tend to forget is including deposits or payments that have been made but not cleared, towards the end of the month.
If you find that there are bank errors, deduct or add them to the ending balance. If your calculations do not tally with the bank statement, inform the bank about the mistake, so that the bank can prepare a reconciliation statement of its own. You may even have to omit a wrong entry for payment or add a posting which you may have forgotten. Inaccurate deposits and deductions need to be corrected. You may also check for bank charges like account handling fees. You will also have to add any kind of interest earned on the deposits.
What is Account Reconciliation?
Nowadays, this term mostly refers to what we know as bank reconciliation. The term account reconciliation has a deeper meaning. It refers to the tallying of two sets of transactions. For example, after you use your credit card, you receive a receipt that you stack away. After you receive the monthly bill from your credit card company, you compare it with your stack of receipts. This is known as account reconciliation and if the reconciliation is regarding your bank account, it is referred to as bank reconciliation. Reconciliation is done by companies and individuals alike. The only difference is that companies use accounting software for this purpose (considering the size of the transactions) while individuals need to do it manually.
The comparison of the two (accounting records and bank statement) is done in order to find the outstanding records and to correct errors. It is also carried out to find how many transactions went unrecorded in the previous accounting period.
What are the Steps for Account Reconciliation?
Step 1
First, gather all the relevant accounting information. This includes, updating your checkbook, getting a bank statement and gathering all your ATM withdrawal slips together.
Step 2
Jot down the last balancing figure from the bank statement. Deduct the bank charges from the balance of your bank account. Compare the deposit slips with your bank statement. If there are any checks (deposits) that have not been cleared or approved in the statement before the last day of the month, add the amounts to the balancing figure. You can also add to the balancing figure, any kind of interest that is due, but not received. This final balancing figure is also termed as the 'running' balance.
Step 3
In this step, start comparing your payment receipts with that of the bank statement. Compare the ATM withdrawal slips, the checks paid and the payments that are due but have not yet been passed by the bank. Take the sum total of all the amounts of the payments and withdrawals and subtract it from the running balance. Note down any monthly bills that are deducted directly from your bank account. Deduct the same from the running figure. For example, if your electricity bill is directly deducted from your bank account, then reduce its amount from your running balance. Once you are done with the deductions, the balance amount that you have should tally with the total balance in your bank statement.
Step 4
Make a comparison of the amounts in your check register and bank statement. If the balance of the bank statement and running figure does not tally, there is some error. Use a calculator and find out the error in the ending balance of the checkbook register, beginning from the end of the last month's statement. Next, confirm all the payments and withdrawals (those that have been cleared or not cleared). Use your payment and withdrawal slips, while doing so. You will come to know whether the transactions on your slips tally with the bank statement or not. If it is not tallying, re-check the amounts.
Example
If you are a beginner at account reconciliation, one of the simplest ways to tally the accounts is by tallying the check register balance figure with that in your bank statement every month. For this, make two columns; one will be the book column and the other will be the bank column. The book column will show the balance of your check register on the date present on the bank statement. In the bank column, write the balance it shows in your bank statement for that particular date. Following is an example of a bank account reconciliation.
Book Bank
January 31 Balance $2610.20 January 31 Balance $2760.60
Add: Interest Credited +$2.10 Less: OS ck #255 (Installment) -$150.20
Add: Refund (Grinder) +$50.10 Less: ATM withdrawal (January 30) -$100.00
Less: Adjusting Error #249 -$152.00 Less: OS ck #256 (Fees) -$10.00
Less: Bank Charges Debited -$10.00 ---
New Balance $2500.40 New Balance $2500.40
Tips
It is recommended that you prepare an account reconciliation statement every month. You will find it difficult to prepare one initially, however, with practice you will be able to master it. Here are some useful tips for making an account reconciliation statement.
✓ Always maintain a record of all your debit and credit transactions in your check register.
✓ There are chances that you record a payment of $15 as $51, for instance. Hence, be careful while writing the numbers.
✓ Check if you have mistakenly added a transaction twice.
✓ Check if you have mistakenly cleared any item or missed clearing an item.
✓ Whenever you visit the ATM, collect the printed slip of the transaction and put it aside safely. Continue collecting the printed slips for every transaction, till the end of the month.
✓ Collect the deposit slips of checks and stack them sequentially.
✓ You may also check if you have recorded a deposit as payment or vice versa.
✓ Whenever you hand out a check, make it a point to record it in the checkbook register (the one that is attached to your checkbook).
Pros and Cons of Mobile Banking
The findings of a latest survey show that Mobile devices account for nearly 25% of visits to a bank website. The reason is simply the convenience and portability that the cell phone offers. But this comfort comes with a price. Given below are the pros and cons of mobile banking that you must know before accessing your account from your mobile phone.
The findings of a latest survey show that Mobile devices account for nearly 25% of visits to a bank website. The reason is simply the convenience and portability that the cell phone offers. But this comfort comes with a price. Given below are the pros and cons of mobile banking that you must know before accessing your account from your mobile phone.
According to a new database released by the World Bank in April
this year, nearly 2.5 billion people, almost one half of the adult
population around the world, don't have any formal access to our complex
financial system, let alone, its simplest format - the banking system.
This leaves a major fraction of the poor population dependent on private
money lenders, who charge very high interest rates contributing to the
vicious cycle of exploitation and poverty. Moreover, financial exclusion
of a major part of the world population has also occurred because of
several other reasons that include, poor bank infrastructure, long
travel distance to banks and the amount of paperwork required to open a
bank account. These glaring issues have been now realized by financial
institutions. The central banks of almost all developing countries are
pushing reforms on a mammoth scale to bank the unbanked poor and in this
massive endeavor, technology is turning out to be their greatest hope.
The most famous among all the measures adopted to bank nearly half of the unbanked adult population is mobile banking. The surge of optimism surrounding this latest technology that has the immense potential to alleviate billions of people from poverty, has been fueled by the exponential increase in the number of mobile subscribers all across the globe, with developing economies like India and China, leading the way. To just give you a perspective, Cisco's recently published "Visual Networking Index (VNI) Global Mobile Data Traffic Forecast Update" stated that by the end of 2012, the number of mobile devices in the world will exceed the World's population! If all goes well, it may be possible for mobile banking to transform the world's financial landscape and redefine the relations of banks and its consumers, not only in developing countries but also in the developed ones. While we look forward to mobile banking revolution shape our lives, we need to understand both sides of the coin, to get a larger perspective. Here we analyze what's so perfect about this form of banking and what's the issue we may encounter in its execution.
Benefits of Mobile Banking
There are a lot of benefits of banking using mobile phones. The obvious is that this is a time saving, no-queue method of banking wherein almost all banking related services can be accessed through the mobile. It also offers services like ATM locator, remote deposits as well as mobile payments to the users. The biggest boost to this technology is the availability of smartphones that have simply made our lives easier.
The mobile banking service offered by almost all banks is free of cost. This means that the customer can handle hassle-free transactions without extra charges.
There are three ways in which the services can be accessed from the mobile depending upon the cell phone compatibility and its make. This makes mobile banking available for everyone. The first one is through SMS wherein the balance information and banking passwords are sent to the user via SMS. Secondly, some banks have dedicated software applications that can be downloaded on the mobile for accessing the bank account. Thirdly, the mobiles that have Internet browser facility can access the banking applications easily like a computer.
The bank servers are encrypted for wireless transactions. This means that this mode of transaction may actually be better secured than transactions through wired connections.
The account information along with the account number is not displayed on the wireless connection. This helps more towards data security.
Risks of Mobile Banking
As with any new technology, the mobile banking too, has its disadvantages. Listed below are the major ones.
The biggest security risk in mobile banking is the non-encrypted servers of cell phone service providers. This makes it relatively very easy for an expert hacker to obtain account information or debit and credit card information of the users.
The messages that are received from the banks are not encrypted. This means that, that information could easily have been breached while being transmitted through mobile carrier.
If the mobile gets stolen, the information stored in messages can be used easily by another person.
Mobile phones that use Inte
The most famous among all the measures adopted to bank nearly half of the unbanked adult population is mobile banking. The surge of optimism surrounding this latest technology that has the immense potential to alleviate billions of people from poverty, has been fueled by the exponential increase in the number of mobile subscribers all across the globe, with developing economies like India and China, leading the way. To just give you a perspective, Cisco's recently published "Visual Networking Index (VNI) Global Mobile Data Traffic Forecast Update" stated that by the end of 2012, the number of mobile devices in the world will exceed the World's population! If all goes well, it may be possible for mobile banking to transform the world's financial landscape and redefine the relations of banks and its consumers, not only in developing countries but also in the developed ones. While we look forward to mobile banking revolution shape our lives, we need to understand both sides of the coin, to get a larger perspective. Here we analyze what's so perfect about this form of banking and what's the issue we may encounter in its execution.
Benefits of Mobile Banking
There are a lot of benefits of banking using mobile phones. The obvious is that this is a time saving, no-queue method of banking wherein almost all banking related services can be accessed through the mobile. It also offers services like ATM locator, remote deposits as well as mobile payments to the users. The biggest boost to this technology is the availability of smartphones that have simply made our lives easier.
The mobile banking service offered by almost all banks is free of cost. This means that the customer can handle hassle-free transactions without extra charges.
There are three ways in which the services can be accessed from the mobile depending upon the cell phone compatibility and its make. This makes mobile banking available for everyone. The first one is through SMS wherein the balance information and banking passwords are sent to the user via SMS. Secondly, some banks have dedicated software applications that can be downloaded on the mobile for accessing the bank account. Thirdly, the mobiles that have Internet browser facility can access the banking applications easily like a computer.
The bank servers are encrypted for wireless transactions. This means that this mode of transaction may actually be better secured than transactions through wired connections.
The account information along with the account number is not displayed on the wireless connection. This helps more towards data security.
Risks of Mobile Banking
As with any new technology, the mobile banking too, has its disadvantages. Listed below are the major ones.
The biggest security risk in mobile banking is the non-encrypted servers of cell phone service providers. This makes it relatively very easy for an expert hacker to obtain account information or debit and credit card information of the users.
The messages that are received from the banks are not encrypted. This means that, that information could easily have been breached while being transmitted through mobile carrier.
If the mobile gets stolen, the information stored in messages can be used easily by another person.
Mobile phones that use Inte
Essential Things to Consider When Opening a Bank Account
A bank account should be opened after some careful thought process. Here is what you need to check before opening a bank account.
A bank account should be opened after some careful thought process. Here is what you need to check before opening a bank account.
Saving your hard-earned money in a bank account is one of the best
exercises. However, such decisions are not to be randomly taken. There
are several competing banks in the market that may try to entice you
with schemes and offers for opening a new account with them. You need to
be a smart prospective customer and scrutinize certain things before
completing the account opening formalities and signing on the dotted
line.
Considerations While Opening a Bank Account
Go through the below points in order to find the perfect bank for saving your money.
Bank's Trustworthiness
One of the foremost points to look out for is the bank's trustworthiness. Since you plan to deposit your hard-earned savings with the bank, it is essential to know that your money is safe and secure with the institution you plan to bank with. You need to make a background check of the bank and find out if the bank has all the necessary certifications to work. You may go online and check the Internet database for level of customer satisfaction pertaining to the bank's reliability.
Bank's Ratings
Sometimes, it is best to choose a bank with a market reputation for its banking service quality standards. Look out for annual rating of banks appearing on the Internet. That is one of the best clue for choosing and ideal bank.
Maintenance of Balance
Whenever you are approached for opening a new account with a bank, check if the bank's policies offer you a facility of zero balance maintenance. It is often noticed that a bank may offer zero balance facility for the first year of holding the bank account only. Subsequently, as your account becomes older, they revert certain rules and expect you to maintain at least a certain minimum amount of dollars in the account. These rules for balance maintenance change from bank to bank as well as for each type of account. At times, these rules change annually as well. As an alert customer, you should get a written set of rules pertaining to balance maintenance before you open your new account. Remember, if you fail to maintain the prescribed account balance, your account might be levied with certain charges.
Bank Charges
There is no service in this world that comes free of cost and that goes for banking too. There is usually a printed charge schedule available in every bank. You can find out if the bank charges money for issuing a new check book, debits cards, etc. Similarly, some banks charge dearly for returning of bounced checks, stop payments, for issuance of statements and other service charges. You need to collect charge schedule of competing banks and find out if the banks are charging competitive rates or not. Often, you can meet the bank's manager and discuss certain terms with him. e.g. If you avail of multiple accounts or promise to keep a huge balance with bank, then chances are that you can negotiate with the manager for a waiver of fees and charges.
Banking Stationery Kit
It is essential to understand what all is included in the banking kit that customers are given when the account is opened. Here you need to be aware that a normal kit contains the bank's check book and a debit card. Nowadays, owing to tremendous competition, banks also offer additional pieces of stationery in their kit. Make sure to find out if the bank offers a free credit card or discount coupons along with the rest of the stationery kit.
Banking Facilities
Banks don't just offer you an account to save your money. They in fact, offer a host of other facilities like home banking, online banking, foreign exchange or Forex services, loans and advances, investment advisory services, safe deposit vaults, etc. You can go online and check for the bank's rating with terms to these facilities. The banks are also rated with reference to their customer service quality, efficiency of banking staff etc. An important point to be checked is that of the bank's phishing attacks record. Phishing attacks refer to the fraudulent transfer of money through online banking facility owing to insecure online banking facilities. You may also find out details about the processing time taken by a bank for fulfilling your service requests in general.
Interest Paid
An important and crucial reason for saving money in a bank is to get monetary returns or interest against it. The banks have a policy to pay interest on certain types of accounts only. Also, the rate of interest applicable on your savings change with every bank's policy and extent of balance maintenance. As alert customers, you need to find out the rate of interest you are liable to receive along with the monthly date on which bank's interest become due.
Proximity of Bank
Often, prospective customers are approached by the marketing team of a bank and coaxed to banking account with them. Point is, your bank should be conveniently located near your home or your workplace. It is pointless to open a bank account in a totally different city or a far off suburb. If you have no option but to open such an account, then find out if you can operate the account from any other branches of the bank as per your convenience.
Considerations While Opening a Bank Account
Go through the below points in order to find the perfect bank for saving your money.
Bank's Trustworthiness
One of the foremost points to look out for is the bank's trustworthiness. Since you plan to deposit your hard-earned savings with the bank, it is essential to know that your money is safe and secure with the institution you plan to bank with. You need to make a background check of the bank and find out if the bank has all the necessary certifications to work. You may go online and check the Internet database for level of customer satisfaction pertaining to the bank's reliability.
Bank's Ratings
Sometimes, it is best to choose a bank with a market reputation for its banking service quality standards. Look out for annual rating of banks appearing on the Internet. That is one of the best clue for choosing and ideal bank.
Maintenance of Balance
Whenever you are approached for opening a new account with a bank, check if the bank's policies offer you a facility of zero balance maintenance. It is often noticed that a bank may offer zero balance facility for the first year of holding the bank account only. Subsequently, as your account becomes older, they revert certain rules and expect you to maintain at least a certain minimum amount of dollars in the account. These rules for balance maintenance change from bank to bank as well as for each type of account. At times, these rules change annually as well. As an alert customer, you should get a written set of rules pertaining to balance maintenance before you open your new account. Remember, if you fail to maintain the prescribed account balance, your account might be levied with certain charges.
Bank Charges
There is no service in this world that comes free of cost and that goes for banking too. There is usually a printed charge schedule available in every bank. You can find out if the bank charges money for issuing a new check book, debits cards, etc. Similarly, some banks charge dearly for returning of bounced checks, stop payments, for issuance of statements and other service charges. You need to collect charge schedule of competing banks and find out if the banks are charging competitive rates or not. Often, you can meet the bank's manager and discuss certain terms with him. e.g. If you avail of multiple accounts or promise to keep a huge balance with bank, then chances are that you can negotiate with the manager for a waiver of fees and charges.
Banking Stationery Kit
It is essential to understand what all is included in the banking kit that customers are given when the account is opened. Here you need to be aware that a normal kit contains the bank's check book and a debit card. Nowadays, owing to tremendous competition, banks also offer additional pieces of stationery in their kit. Make sure to find out if the bank offers a free credit card or discount coupons along with the rest of the stationery kit.
Banking Facilities
Banks don't just offer you an account to save your money. They in fact, offer a host of other facilities like home banking, online banking, foreign exchange or Forex services, loans and advances, investment advisory services, safe deposit vaults, etc. You can go online and check for the bank's rating with terms to these facilities. The banks are also rated with reference to their customer service quality, efficiency of banking staff etc. An important point to be checked is that of the bank's phishing attacks record. Phishing attacks refer to the fraudulent transfer of money through online banking facility owing to insecure online banking facilities. You may also find out details about the processing time taken by a bank for fulfilling your service requests in general.
Interest Paid
An important and crucial reason for saving money in a bank is to get monetary returns or interest against it. The banks have a policy to pay interest on certain types of accounts only. Also, the rate of interest applicable on your savings change with every bank's policy and extent of balance maintenance. As alert customers, you need to find out the rate of interest you are liable to receive along with the monthly date on which bank's interest become due.
Proximity of Bank
Often, prospective customers are approached by the marketing team of a bank and coaxed to banking account with them. Point is, your bank should be conveniently located near your home or your workplace. It is pointless to open a bank account in a totally different city or a far off suburb. If you have no option but to open such an account, then find out if you can operate the account from any other branches of the bank as per your convenience.
Joint Bank Accounts: To Share or Not to Share?
If you're entering a committed relationship, you might be wondering if joint bank accounts are right for you.
If you're entering a committed relationship, you might be wondering if joint bank accounts are right for you.
One of the first things any committed partners need to discuss is
how to handle the joint finances. When you move in with someone or marry
someone, it is impossible to think that you will be keeping your
finances totally separate, especially when so much of your financial
lives will be tied up together. Of course, you'll be paying bills
together and planning vacations together, etc. Also, if a mortgage is in
both of your names or if unexpected needs like medical bills or a new
appliance comes up, it's safe to assume you'll probably be sharing those
expenses. However, with more women continuing to work outside the home
after marriage and earning their own benefits and assets, sometimes it
is difficult to think of sharing that with another person, especially
with divorce rates on the rise as well. Having a joint bank account
isn't for everyone, but some careful consideration and a discussion with
your partner will help you figure out the option that's right for you.
The Pros of a Joint Account
Having joint bank accounts can be a wonderful thing. With all of your money in one place, it can be easier to track spending, pay bills, and save money for your future. Instead of having separate accounts from which you both spend what you want and don't track it jointly, you have one account that every paycheck goes into and every purchase comes out of. With a joint credit card, you can also earn more rebate points together than separate, not to mention that building a good credit rating together is easier than doing it alone. Equally important is the fact that if one person has a bad credit rating, then financially attaching that person to the one with a better credit rating can improve interest rates and save your money over the long term. With a joint account, though, it is best to have one person in charge of the money and finances in the household. That person should be in control of the budget, paying the bills, tracking receipts, and be able to check online banking accounts regularly to be sure spending is not getting out of hand.
The Cons of a Joint Account
With divorce rates on the rise, it can be daunting to share a financial future with someone. Having no financial accounts in your name can hurt your credit rating in the event of a divorce or terrible loss. Also, when sharing all the bills and all the money, as well as sharing retirement accounts, you have to completely trust the person you're with to do the right things with your money, which can be equally frightening. If you're a person that has issues trusting someone else with your money, a joint account might not be right for you. This doesn't speak badly about your relationship. Rather, it speaks volumes about your independence and ability to handle your own money. If you decide not to have a joint account, however, this might create more work for you and make you less able to track your joint spending.
Ways to Meet in the Middle
Just because you're in a committed relationship doesn't mean you have to share all of your finances, though you might find it beneficial to share some of them. It's possible to keep separate checking and credit card accounts while also having joint checking, savings, and credit card accounts. Each of you can have your own spending money to do whatever you want with, and you both can keep a credit card to help keep up your individual credit rating. Then, the joint account can be used just for shared bills and expenses.
The Pros of a Joint Account
Having joint bank accounts can be a wonderful thing. With all of your money in one place, it can be easier to track spending, pay bills, and save money for your future. Instead of having separate accounts from which you both spend what you want and don't track it jointly, you have one account that every paycheck goes into and every purchase comes out of. With a joint credit card, you can also earn more rebate points together than separate, not to mention that building a good credit rating together is easier than doing it alone. Equally important is the fact that if one person has a bad credit rating, then financially attaching that person to the one with a better credit rating can improve interest rates and save your money over the long term. With a joint account, though, it is best to have one person in charge of the money and finances in the household. That person should be in control of the budget, paying the bills, tracking receipts, and be able to check online banking accounts regularly to be sure spending is not getting out of hand.
The Cons of a Joint Account
With divorce rates on the rise, it can be daunting to share a financial future with someone. Having no financial accounts in your name can hurt your credit rating in the event of a divorce or terrible loss. Also, when sharing all the bills and all the money, as well as sharing retirement accounts, you have to completely trust the person you're with to do the right things with your money, which can be equally frightening. If you're a person that has issues trusting someone else with your money, a joint account might not be right for you. This doesn't speak badly about your relationship. Rather, it speaks volumes about your independence and ability to handle your own money. If you decide not to have a joint account, however, this might create more work for you and make you less able to track your joint spending.
Ways to Meet in the Middle
Just because you're in a committed relationship doesn't mean you have to share all of your finances, though you might find it beneficial to share some of them. It's possible to keep separate checking and credit card accounts while also having joint checking, savings, and credit card accounts. Each of you can have your own spending money to do whatever you want with, and you both can keep a credit card to help keep up your individual credit rating. Then, the joint account can be used just for shared bills and expenses.
Tips to Secure Mobile Banking Services
Mobile banking allows customers to perform a variety of banking transactions through their mobiles, smartphones, and even PDAs. With so much financial information being passed over wireless networks, security is of utmost concern in mobile banking.
Mobile banking allows customers to perform a variety of banking transactions through their mobiles, smartphones, and even PDAs. With so much financial information being passed over wireless networks, security is of utmost concern in mobile banking.
The use of mobile phones nowadays is not limited to making calls
and texting. People use their phones to check e-mails, browse the
Internet, and to carry out banking functions like account transactions,
balance checking, account activity (withdrawals, deposits, etc.) alerts,
changing PINs, just to name a few. Mobile banking is growing
exponentially, and with sensitive financial information available at the
touch of a finger, safety is the topmost concern for customers and
banks to avoid any fraudulent activity. Here's how you can secure your
mobile banking services to keep all your financial data from harm.
Security Tips for Mobile Banking
Use Authentic Banking Software
Make sure you install authentic software on your mobile phones, and ensure it is from a trusted and approved source. Most of the banking software for mobile phones is developed by third-party firms, so before you download anything, confirm with the bank for the authenticity and the latest version.
Password Protection
Protect your mobile with a password, and set the maximum number of incorrect passwords a user tries to enter to three. After three unsuccessful attempts, the mobile should automatically wipe out all the data that is stored on it for security reasons. Choose passwords that are composed of alphanumeric and special characters, and those which others cannot guess. Do not use date of birth, SSN, or any names as passwords. Change your password once a month.
PIN Protection
Change the personal identification number (PIN) or access code provided by the bank at the first attempt. Use a combination of numbers that is difficult to guess for anyone, and does not include SSN or date of birth. Change the PIN regularly and do not repeat the same PIN. Banks usually take precautions in this case and do not allow users to reuse PINs frequently.
Manage Personal Information
Avoid storing your bank account details (account number, credit/debit card number, PIN) on your phone. Do not use the auto-fill option on the browser which stores your mobile banking user ID and password. Never share these details or any other information with others through texts and e-mails via your phone. Make it a point to go through your account statements on a regular basis if you are into mobile banking and bring any unusual activity to the notice of the bank immediately. If you receive paper statements, save them in case you need to track your transaction details; they might also be helpful to reverse a transaction you never actually carried out. If you have signed up for text alerts, you should be alerted of every activity being carried out on your account. If you give your mobile for repair, delete the browsing history, cache, and any other temporary folders that may contain sensitive data so that it does not fall into the wrong hands. Disable any mobile banking application you might have downloaded. Keep the Bluetooth feature disabled if not in use. Install an antivirus software on your mobile device which will protect the data and keep malicious viruses away. Always remember to log out from the banking application after you have completed your banking transactions. Never log in to your banking account over a non-secure Wi-Fi network, like the ones at a coffee shop or a shopping mall.
Beware of Phishing
A technique used by schemers to illegally acquire personal information from users without their knowledge. When it comes to mobile banking, phishers send fake text messages to users asking for their bank login details. In some cases, users may also receive instant messages and e-mails which ask them to dial a phone number or directs them to an authentic-looking website which prompts them to log in and reveal all account information. Other ways of phishing prompts users to download applications on their smartphones, which install the harmful keylogging virus which can track the keys the users press, which then enables phishers to monitor the activity on their victims' devices to gain access to personal data. In many cases, users do not realize that the texts and emails sent are fake, or that they are being directed to a fake website since it looks just like the bank's login page. Be very careful if you receive any such texts or e-mails. As a rule, banks will never ask you for your PIN, credit/debit card number, SSN, or any other account information via a text message or e-mail. If you are doubtful about the source of the e-mail or text message and receive any such message, delete it! It's likely an attempt to phish for information.
Report a Lost/Stolen Mobile
In case you lose your mobile, report it immediately to the local police as well as your service provider. Then call the bank and request them to deactivate the banking applications you might have downloaded, so no one can gain access to your account information.
Security Tips for Mobile Banking
Use Authentic Banking Software
Make sure you install authentic software on your mobile phones, and ensure it is from a trusted and approved source. Most of the banking software for mobile phones is developed by third-party firms, so before you download anything, confirm with the bank for the authenticity and the latest version.
Password Protection
Protect your mobile with a password, and set the maximum number of incorrect passwords a user tries to enter to three. After three unsuccessful attempts, the mobile should automatically wipe out all the data that is stored on it for security reasons. Choose passwords that are composed of alphanumeric and special characters, and those which others cannot guess. Do not use date of birth, SSN, or any names as passwords. Change your password once a month.
PIN Protection
Change the personal identification number (PIN) or access code provided by the bank at the first attempt. Use a combination of numbers that is difficult to guess for anyone, and does not include SSN or date of birth. Change the PIN regularly and do not repeat the same PIN. Banks usually take precautions in this case and do not allow users to reuse PINs frequently.
Manage Personal Information
Avoid storing your bank account details (account number, credit/debit card number, PIN) on your phone. Do not use the auto-fill option on the browser which stores your mobile banking user ID and password. Never share these details or any other information with others through texts and e-mails via your phone. Make it a point to go through your account statements on a regular basis if you are into mobile banking and bring any unusual activity to the notice of the bank immediately. If you receive paper statements, save them in case you need to track your transaction details; they might also be helpful to reverse a transaction you never actually carried out. If you have signed up for text alerts, you should be alerted of every activity being carried out on your account. If you give your mobile for repair, delete the browsing history, cache, and any other temporary folders that may contain sensitive data so that it does not fall into the wrong hands. Disable any mobile banking application you might have downloaded. Keep the Bluetooth feature disabled if not in use. Install an antivirus software on your mobile device which will protect the data and keep malicious viruses away. Always remember to log out from the banking application after you have completed your banking transactions. Never log in to your banking account over a non-secure Wi-Fi network, like the ones at a coffee shop or a shopping mall.
Beware of Phishing
A technique used by schemers to illegally acquire personal information from users without their knowledge. When it comes to mobile banking, phishers send fake text messages to users asking for their bank login details. In some cases, users may also receive instant messages and e-mails which ask them to dial a phone number or directs them to an authentic-looking website which prompts them to log in and reveal all account information. Other ways of phishing prompts users to download applications on their smartphones, which install the harmful keylogging virus which can track the keys the users press, which then enables phishers to monitor the activity on their victims' devices to gain access to personal data. In many cases, users do not realize that the texts and emails sent are fake, or that they are being directed to a fake website since it looks just like the bank's login page. Be very careful if you receive any such texts or e-mails. As a rule, banks will never ask you for your PIN, credit/debit card number, SSN, or any other account information via a text message or e-mail. If you are doubtful about the source of the e-mail or text message and receive any such message, delete it! It's likely an attempt to phish for information.
Report a Lost/Stolen Mobile
In case you lose your mobile, report it immediately to the local police as well as your service provider. Then call the bank and request them to deactivate the banking applications you might have downloaded, so no one can gain access to your account information.
Famous Bank Runs in History
Retrospect can make things look a lot simpler; fear breeds panic, panic breeds chaos and if things are not controlled, ends up as eventual downfall. The principle is self-destruction cannot be better explained without the help of a bank run.
Retrospect can make things look a lot simpler; fear breeds panic, panic breeds chaos and if things are not controlled, ends up as eventual downfall. The principle is self-destruction cannot be better explained without the help of a bank run.
So you finally get a job, work hard, get your first salary, work
harder, climb the ladder up and start saving up a decent chunk of cash
in 'this very trusted bank used by everybody'. One day, you hear that
this bank is about to shut down because of financial reasons. You panic,
rush to the bank and take out all the money you have, every last cent.
Now, imagine all the customers of that bank rushing in to safeguard
their money. This is called a bank run. Now, the thing about a bank run
is that whichever bank it is, if they even try to joke about losing
money, theirs will not be ones of a good sense of humor. People will
take any means necessary to protect their well-earned money, and when
they find out it's in danger, they jump in to 'give it a hand'. Within
hours or a few days, the bank gets cleaned out. The problem is, if the
bank is indeed starting to sink, it will want to use whatever money it
has left to stop that from happening. But they can't do that, because
people are emptying their accounts. Thus, the bank rumored to fall,
falls for real. This is a serious problem indeed, because the event can
cause a chain of other financially draining activities that lead to an
economic depression. If man is meant to learn from his mistakes, here
are the largest bank runs from which we can learn most.
The Biggest Bank Runs In History
The Panic of 1907
As if a single bank run wasn't bad enough, this plot includes farmers, foreign investors, Theodore Roosevelt, J.P. Morgan (by now more like a superhero) and a citywide earthquake, smack in the middle of a recession. It all started with the blunder of Otto Heinze, brother of F. Augustus Heinze, a giant in the copper industry. Otto intended to corner United Copper, a copper industry in America. His attempt to squeeze borrowed stocks misfired horribly, ending with the ruin of both the Heinze brothers and the bankruptcy of Otto's brokerage house, Gross and Kleeberg along with the Knickerbocker Trust Company. Seeing this, the people, already bearing the brunt of the recession and the economic problems due to an earthquake in San Francisco, ran off to get their money back. Soon rumors of other banks and trusts being in financial trouble took off, prompting the frenzy of everyone. J.P. Morgan, with the help of other big names in banking, took hold of the reigns and eventually brought peace and calm over America. The end result was the birth of a National Reserve Bank, designed to handle similar crisis in the future. Unfortunately, it also ended with the defamation of J.P. Morgan and his subsequent demise after the Pujo Committee, which was investigating Morgans assets.
The 1929 Wall Street Crash
This fiasco is agreed on as the largest financial disaster in all of American history. It was so bad, it started off the 12-year Great Depression. Ironically (to the normal perspective), the crash happened within the period of extraordinary financial gains that all Americans were enjoying, known as the Roaring Twenties.
Concept of Marginal Purchase
Many had concluded before the crash that this state of prosperity was meant to be permanent. In fact, it was this state of happiness that led almost everyone to blindly believe in the stock market, so much so that they would buy stocks on a margin all the time.
Buying stocks on margin means the person buying the stocks can't afford them, so turns to a brokerage for assistance.
At the time, if you bought a stock on margin, you would pay for about 10% to 20%, while the broker paid for 80% to 90%.
Of course, if the price of the stock fell beyond a certain limit, the broker would issue a 'Margin Call' to the buyer who would have to pay the money immediately.
Warning Bells
March 25, 1929 is when there occurred a slight dip in the market. It wasn't actually much to panic over, but people started getting margin calls from these brokers all of a sudden. This, in turn, prompted people who witnessed it to hurry up and sell off their stocks in fear of having to cough up large amounts of money to the broker (80% to 90% of total stock price that the broker paid for). One by one, people started selling off, prompting others to do the same. This didn't lead to much, except several warnings by market bigwigs about an impending major crash.
Black Thursday
The "Black Thursday", October 24, 1929, is when the prediction came true. Stock prices fell so low, a large number of people got margin calls, which made a larger number to sell their stocks. The damage was, at the time, handled by a banker's group, who stockpiled their money into the stock market and managed to convince the public to stop selling, stopping any further damages by the end of the afternoon. About 12.9 million shares were sold on 'Black Thursday'. The problem was said to be in control, until it happened again.
Black Monday
"Black Monday", October 28, 1929, the stock market dipped again, people started selling stocks again, but this time there was little or no financial backing to the market. The problem here was the inability of control over the situation, especially by the major banks. They kept quiet throughout the debacle, which made people think that even the banks were selling.
Black Tuesday
The almost-apocalyptic day that followed, "Black Tuesday", is the worst day in American financial history, with over 16.4 million shares sold. The stock market was shut down the next day for 4 days, after which it was opened for a few hours, which still recorded a drop. The fall continued for almost two years. Dow Jones, which closed at 381.17 on September 3, 1989, recorded 41.22 on July 8, 1932. Even though the causes of the crashes are still not perfectly clear, what remains to be learned is the destruction the crash encumbered the coming generations with; reports of mass suicides (including people jumping off the upper floors of Wall Street), countless lives were doomed to unemployment, people started distrusting banks at a whole new level.
The Argentinian Debacle
This is a modern-age bank run that almost destroyed the entire economy of Argentina. The timeline starts with worsening economic and political conditions. Fernando De La Rua became the Argentinian president on December 10, 1999, with Ricardo Lopez Murphy joining him as the new economy minister, after the resigning of Mr. Machinea in March 2001. The discovery of rampant corruption as the sole cause of increasing debts in the Government treasury prompted them to take quick decisions. They eventually decided to revalue their currency exchange with 1 Peso equaling $1. Now, the majority of goods exported by Argentina were to Brazil and the European Union, both of whom decided that the new prices for importing were too much. This led to a perpetual halt on Argentinian exports. It led to mass unemployment and lowered wages. The consequent inflation of consumer goods made citizens to start withdrawing money by the truck loads. Add to this, the decline of investments received by banks and you have yourselves a bank run. The Argentinian Government ordered an indefinite closure of all banks in the country. This further fueled citizens frustration, who then started converting their pesos to dollars and pursue foreign investments. To plug the money leak, the Government stopped banking and foreign exchange transactions. The cherry on the icing came when the Government banned citizens from withdrawing more than $500 of their own money, but it was too late. Almost 10% of their total money had already been leaked out. The entire affair reached the crescendo when protesters were shot outside the Buenos Aires branch of HSBC.
Other Notable Bank Failures
The Bankruptcy of Lehmann Brothers
The biggest case of leveraging gone wrong in US history is credited to the Lehmann Brothers. a subprime mortgage crisis, forcing the Lehmann Brothers to file for bankruptcy. As a result, Dow Jones dropped (-4.4%) on September 15th, 2008 and again (-7%) on September 29th, 2008.
Northern Rock
Following a liquidity crisis in 2007, the Northern Trust's stock fell by 32%. Although this was not a classic bank run, the effects were similar and it all ended up with the bank being declared as a national bank.
The Biggest Bank Runs In History
The Panic of 1907
As if a single bank run wasn't bad enough, this plot includes farmers, foreign investors, Theodore Roosevelt, J.P. Morgan (by now more like a superhero) and a citywide earthquake, smack in the middle of a recession. It all started with the blunder of Otto Heinze, brother of F. Augustus Heinze, a giant in the copper industry. Otto intended to corner United Copper, a copper industry in America. His attempt to squeeze borrowed stocks misfired horribly, ending with the ruin of both the Heinze brothers and the bankruptcy of Otto's brokerage house, Gross and Kleeberg along with the Knickerbocker Trust Company. Seeing this, the people, already bearing the brunt of the recession and the economic problems due to an earthquake in San Francisco, ran off to get their money back. Soon rumors of other banks and trusts being in financial trouble took off, prompting the frenzy of everyone. J.P. Morgan, with the help of other big names in banking, took hold of the reigns and eventually brought peace and calm over America. The end result was the birth of a National Reserve Bank, designed to handle similar crisis in the future. Unfortunately, it also ended with the defamation of J.P. Morgan and his subsequent demise after the Pujo Committee, which was investigating Morgans assets.
The 1929 Wall Street Crash
This fiasco is agreed on as the largest financial disaster in all of American history. It was so bad, it started off the 12-year Great Depression. Ironically (to the normal perspective), the crash happened within the period of extraordinary financial gains that all Americans were enjoying, known as the Roaring Twenties.
Concept of Marginal Purchase
Many had concluded before the crash that this state of prosperity was meant to be permanent. In fact, it was this state of happiness that led almost everyone to blindly believe in the stock market, so much so that they would buy stocks on a margin all the time.
Buying stocks on margin means the person buying the stocks can't afford them, so turns to a brokerage for assistance.
At the time, if you bought a stock on margin, you would pay for about 10% to 20%, while the broker paid for 80% to 90%.
Of course, if the price of the stock fell beyond a certain limit, the broker would issue a 'Margin Call' to the buyer who would have to pay the money immediately.
Warning Bells
March 25, 1929 is when there occurred a slight dip in the market. It wasn't actually much to panic over, but people started getting margin calls from these brokers all of a sudden. This, in turn, prompted people who witnessed it to hurry up and sell off their stocks in fear of having to cough up large amounts of money to the broker (80% to 90% of total stock price that the broker paid for). One by one, people started selling off, prompting others to do the same. This didn't lead to much, except several warnings by market bigwigs about an impending major crash.
Black Thursday
The "Black Thursday", October 24, 1929, is when the prediction came true. Stock prices fell so low, a large number of people got margin calls, which made a larger number to sell their stocks. The damage was, at the time, handled by a banker's group, who stockpiled their money into the stock market and managed to convince the public to stop selling, stopping any further damages by the end of the afternoon. About 12.9 million shares were sold on 'Black Thursday'. The problem was said to be in control, until it happened again.
Black Monday
"Black Monday", October 28, 1929, the stock market dipped again, people started selling stocks again, but this time there was little or no financial backing to the market. The problem here was the inability of control over the situation, especially by the major banks. They kept quiet throughout the debacle, which made people think that even the banks were selling.
Black Tuesday
The almost-apocalyptic day that followed, "Black Tuesday", is the worst day in American financial history, with over 16.4 million shares sold. The stock market was shut down the next day for 4 days, after which it was opened for a few hours, which still recorded a drop. The fall continued for almost two years. Dow Jones, which closed at 381.17 on September 3, 1989, recorded 41.22 on July 8, 1932. Even though the causes of the crashes are still not perfectly clear, what remains to be learned is the destruction the crash encumbered the coming generations with; reports of mass suicides (including people jumping off the upper floors of Wall Street), countless lives were doomed to unemployment, people started distrusting banks at a whole new level.
The Argentinian Debacle
This is a modern-age bank run that almost destroyed the entire economy of Argentina. The timeline starts with worsening economic and political conditions. Fernando De La Rua became the Argentinian president on December 10, 1999, with Ricardo Lopez Murphy joining him as the new economy minister, after the resigning of Mr. Machinea in March 2001. The discovery of rampant corruption as the sole cause of increasing debts in the Government treasury prompted them to take quick decisions. They eventually decided to revalue their currency exchange with 1 Peso equaling $1. Now, the majority of goods exported by Argentina were to Brazil and the European Union, both of whom decided that the new prices for importing were too much. This led to a perpetual halt on Argentinian exports. It led to mass unemployment and lowered wages. The consequent inflation of consumer goods made citizens to start withdrawing money by the truck loads. Add to this, the decline of investments received by banks and you have yourselves a bank run. The Argentinian Government ordered an indefinite closure of all banks in the country. This further fueled citizens frustration, who then started converting their pesos to dollars and pursue foreign investments. To plug the money leak, the Government stopped banking and foreign exchange transactions. The cherry on the icing came when the Government banned citizens from withdrawing more than $500 of their own money, but it was too late. Almost 10% of their total money had already been leaked out. The entire affair reached the crescendo when protesters were shot outside the Buenos Aires branch of HSBC.
Other Notable Bank Failures
The Bankruptcy of Lehmann Brothers
The biggest case of leveraging gone wrong in US history is credited to the Lehmann Brothers. a subprime mortgage crisis, forcing the Lehmann Brothers to file for bankruptcy. As a result, Dow Jones dropped (-4.4%) on September 15th, 2008 and again (-7%) on September 29th, 2008.
Northern Rock
Following a liquidity crisis in 2007, the Northern Trust's stock fell by 32%. Although this was not a classic bank run, the effects were similar and it all ended up with the bank being declared as a national bank.
Time Deposits Vs. Demand Deposits
If you are active in the field of banking and finance, then you need to be aware of difference between demand deposits and time deposits. Here's what you need to know.
If you are active in the field of banking and finance, then you need to be aware of difference between demand deposits and time deposits. Here's what you need to know.
Bank deposits have always been amongst the preferred ways of
investment for investors across the world. On the bank deposits, you can
get fixed interest which can help you satisfy your liquidity needs.
Also, the risk associated with such bank deposits is much less as
compared to that prevalent in stock markets and mutual funds. Time
deposits with banks are suggested by many investment advisers and so are
demand deposits. This comparison of time deposits vs. demand deposits
will guide you in the right manner.
Time Deposits
Time deposits are also known as term deposits or fixed deposits in some countries, are deposits in banks or financial institutions for pre-decided or fixed period of time. The depositor is promised a fixed rate of interest for the said period by the financial institution. However, there are some restrictions for the depositors as far as withdrawing money is concerned. In the time deposits, it is not possible to withdraw money before the stipulated time of investment and if it is to be done, then he has to pay a penalty to the financial institution. The depositor is also required to give a written notice to the financial institution when he wishes to withdraw his money from the deposit. Banks have some policies regarding interest for these deposits. The longer time deposit you opt for, the more would be the rate of interest offered to you. Once the duration of the term deposit is over, you can either withdraw your money or opt for the deposit scheme again. The rate of interests earned in these deposits is more than that offered on savings accounts, and less than that earned through long term equity investments.
There are 3 types of time deposits which have been explained below:
Traditional Certificates of Deposits: The investment period of the traditional certificates of deposits can be between one month to five years. Withdrawal before maturity can lead to a deduction of penalty by the financial institution. The Federal Deposit Insurance Corporation insures certificate of deposits issued by banks
Broker Bought Certificate of Deposits: These deposits are first bought by brokers from banks and are then sold to the common customers looking for investments. In such CDs, you have options of keeping money invested for as little as 7 days and also for more than a year
Liquid Certificates of Deposits: The best thing about the liquid CDs is that depositors can withdraw their money at any point of time without penalty charges. Thus, this is an extremely flexible investment option for all kinds of investors. However, the amount of money which you can withdraw without penalties is decided by the banks
Demand Deposits
In the case of demand deposits, the depositor is free to withdraw his funds from the account which he holds with the bank any time, without giving any notice to the bank for the withdrawal. So they are exactly the opposite that of the time deposits. Though getting back funds fast is the main advantage of demand deposits, the major disadvantage is that fees charged for these accounts are higher and interest rates offered are not good enough. So, these deposits would be the best option for people who need money in a few days or months. On the contrary, long term investors should go for time deposits which would yield higher returns.
There are 3 types of demand deposits which have been explained below:
Money Market Accounts: Money market accounts are those in which the interest paid to the depositors is never fixed and can change every day. Though these accounts give higher returns than the saving accounts, changing interest rats may put depositors at loss at times. Fees charged for these accounts are low
Checking Accounts: Checking accounts generally do not pay interest to the depositors and the fees charged for such accounts are usually high. These accounts are ideal for businessmen who nee immediate funds for completing transactions of purchasing goods
Savings Accounts: Savings accounts are the most popular type of demand deposits. Interest is paid at a fixed rate for these accounts which is lower than that on time deposits. Fees are not charged for savings accounts by banks and if charged, they would be quite low
Time Deposits
Time deposits are also known as term deposits or fixed deposits in some countries, are deposits in banks or financial institutions for pre-decided or fixed period of time. The depositor is promised a fixed rate of interest for the said period by the financial institution. However, there are some restrictions for the depositors as far as withdrawing money is concerned. In the time deposits, it is not possible to withdraw money before the stipulated time of investment and if it is to be done, then he has to pay a penalty to the financial institution. The depositor is also required to give a written notice to the financial institution when he wishes to withdraw his money from the deposit. Banks have some policies regarding interest for these deposits. The longer time deposit you opt for, the more would be the rate of interest offered to you. Once the duration of the term deposit is over, you can either withdraw your money or opt for the deposit scheme again. The rate of interests earned in these deposits is more than that offered on savings accounts, and less than that earned through long term equity investments.
There are 3 types of time deposits which have been explained below:
Traditional Certificates of Deposits: The investment period of the traditional certificates of deposits can be between one month to five years. Withdrawal before maturity can lead to a deduction of penalty by the financial institution. The Federal Deposit Insurance Corporation insures certificate of deposits issued by banks
Broker Bought Certificate of Deposits: These deposits are first bought by brokers from banks and are then sold to the common customers looking for investments. In such CDs, you have options of keeping money invested for as little as 7 days and also for more than a year
Liquid Certificates of Deposits: The best thing about the liquid CDs is that depositors can withdraw their money at any point of time without penalty charges. Thus, this is an extremely flexible investment option for all kinds of investors. However, the amount of money which you can withdraw without penalties is decided by the banks
Demand Deposits
In the case of demand deposits, the depositor is free to withdraw his funds from the account which he holds with the bank any time, without giving any notice to the bank for the withdrawal. So they are exactly the opposite that of the time deposits. Though getting back funds fast is the main advantage of demand deposits, the major disadvantage is that fees charged for these accounts are higher and interest rates offered are not good enough. So, these deposits would be the best option for people who need money in a few days or months. On the contrary, long term investors should go for time deposits which would yield higher returns.
There are 3 types of demand deposits which have been explained below:
Money Market Accounts: Money market accounts are those in which the interest paid to the depositors is never fixed and can change every day. Though these accounts give higher returns than the saving accounts, changing interest rats may put depositors at loss at times. Fees charged for these accounts are low
Checking Accounts: Checking accounts generally do not pay interest to the depositors and the fees charged for such accounts are usually high. These accounts are ideal for businessmen who nee immediate funds for completing transactions of purchasing goods
Savings Accounts: Savings accounts are the most popular type of demand deposits. Interest is paid at a fixed rate for these accounts which is lower than that on time deposits. Fees are not charged for savings accounts by banks and if charged, they would be quite low
Difference Between Savings Account and Checking Account
A necessary part of an introduction to our banking system is the knowledge of the types of bank accounts. In this article, I have outlined the difference between savings account and checking account, which are the two primary types, you could choose from.
A necessary part of an introduction to our banking system is the knowledge of the types of bank accounts. In this article, I have outlined the difference between savings account and checking account, which are the two primary types, you could choose from.
Our banking system plays a very important role in the overall
functioning of the economy. It is responsible for introducing liquidity
into the system by providing credit lines to individuals and businesses.
Another important function played by the banking system is that of
offering interest on the savings deposited by customers and managing
their financial transactions. This brings us to the concept of a banking
account and its types.
Opening your first bank account is one of the first steps in taking control of your finances. If you are planning to open your first bank account, to deposit your earnings from your first job or need to switch over to a checking account due to the constraints you face with a savings account, the information provided in the following lines will be helpful.
Opening up a bank account is subscribing to the services of a bank. You deposit your money with them, in return of which they offer you an interest and provide assistance with financial transactions. Depending on the kind of services offered with the account, associated terms and conditions, bank accounts can be differentiated into various types. In the following lines, we differentiate between savings accounts and checking accounts.
What is the Difference Between Savings Account and Checking Account?
Let us begin the differentiation with a definition of both types of accounts, starting with the savings account. As its name itself signifies, this type of account is created for the customer who intends to focus on saving his money and earn a decent interest rate. Most banks make it mandatory that a minimum threshold balance be maintained in such an account.
Also, there tends to be a restriction on the number of withdrawals you can make from such an account, but of course there is no limit on the number of deposits you can make. Most savings accounts do not provide a check book facility, though they allow withdrawals through the use of debit cards, using ATMs (Automatic Teller Machines). There are many types of savings accounts which differ in the rate of interest offered on deposits, along with accompanying services.
With checking accounts, there is no limit on the number of times you may withdraw money in a month. Most importantly, they come with a checkbook facility and a debit card, which makes it easy to carry out multiple financial transactions quite easily. These accounts were created for customers who have no intention of maintaining savings in a bank, but primarily need the service of the institution for personal and business related financial transactions.
So how are these two accounts different? One prime distinction between the two can be made on the basis of interest rates offered by them. Checking accounts come with a substantially low interest rate, compared to savings accounts. The prime difference lies in the fact that checking accounts provide checkbook facility, while savings accounts do not. Also, a checking account may or may not have a restriction on the minimum balance that can be maintained, while savings accounts certainly come with a restriction.
Opening your first bank account is one of the first steps in taking control of your finances. If you are planning to open your first bank account, to deposit your earnings from your first job or need to switch over to a checking account due to the constraints you face with a savings account, the information provided in the following lines will be helpful.
Opening up a bank account is subscribing to the services of a bank. You deposit your money with them, in return of which they offer you an interest and provide assistance with financial transactions. Depending on the kind of services offered with the account, associated terms and conditions, bank accounts can be differentiated into various types. In the following lines, we differentiate between savings accounts and checking accounts.
What is the Difference Between Savings Account and Checking Account?
Let us begin the differentiation with a definition of both types of accounts, starting with the savings account. As its name itself signifies, this type of account is created for the customer who intends to focus on saving his money and earn a decent interest rate. Most banks make it mandatory that a minimum threshold balance be maintained in such an account.
Also, there tends to be a restriction on the number of withdrawals you can make from such an account, but of course there is no limit on the number of deposits you can make. Most savings accounts do not provide a check book facility, though they allow withdrawals through the use of debit cards, using ATMs (Automatic Teller Machines). There are many types of savings accounts which differ in the rate of interest offered on deposits, along with accompanying services.
With checking accounts, there is no limit on the number of times you may withdraw money in a month. Most importantly, they come with a checkbook facility and a debit card, which makes it easy to carry out multiple financial transactions quite easily. These accounts were created for customers who have no intention of maintaining savings in a bank, but primarily need the service of the institution for personal and business related financial transactions.
So how are these two accounts different? One prime distinction between the two can be made on the basis of interest rates offered by them. Checking accounts come with a substantially low interest rate, compared to savings accounts. The prime difference lies in the fact that checking accounts provide checkbook facility, while savings accounts do not. Also, a checking account may or may not have a restriction on the minimum balance that can be maintained, while savings accounts certainly come with a restriction.
Funds Transfer Pricing Explained
Funds transfer pricing is a method of measuring the profitability of a financial institution.
Funds transfer pricing is a method of measuring the profitability of a financial institution.
Every organization, as it grows, needs to keep a track of its
profitability and this is an integral part of financial management of
any financial institution. Tracing profitability value helps these
institutions such as banks to gauge the strength and weakness of funding
procedures they follow. Funds transfer pricing is a tool that helps
these institutions in measurement of the profitability garnered by the
various source of funds individually.
What is it?
It can be defined as a method to determine the measure of lucrativeness contributed by each source of funding, which in turn is used to gauge the strong and weak areas of funding within the organization.
From the above definition, it is clear as to what this tool is about. But how does it help to measure the gains and also indicate the profitability of the various product lines and staff? The answer lies in calculation of the net interest margin on funds gathered by the bank. Banks are a depot of funds. Their business depends on funds received from their prospective customers and third parties. Most of the time, the funds are stored as deposits or are lent as loans or are used for making investments. The financial agreements between the bank and its customers define the amount, term, and rate of interest for the funds deposited or invested. The net interest margin which is calculated by this tool depends on the interest payments of the loans lent. Also, the contributions made to net margin and value are not always equal. So, this method helps in assessing the overall profitability of the bank on the basis of the net interest margin.
How to Calculate it?
All financial institutions like banks maintain a funds transfer pricing curve, which is calculated by plotting yield to maturity against time to maturity. From this graph, the rate of fund lending needs of each branch of the bank is calculated and compared. But what is the source of fund lending? Net interest income! The biggest and the primary measure of a bank's profitability is net interest income, which accounts for approximately 80% of a bank's revenue. This income is used as one of the sources of fund lending. When a bank has to lend money, it will loan the desired amount from the deposits made. Each deposit has a token value registered by the funds transfer pricing tool. And for every deposit, the loan catering to it has a cost assigned. Hence, this financial tool is an integral component of profitability measurement process, that helps in calculation of net interest rate margin (IRM). The net interest rates are assigned to all earning assets to reflect the source of funding within the bank.
IRM = Interest earned on the funds used for investments - Interest expense on funds deposited
The calculation is usually done by pooled approaches or specific assignment approaches. In both the methods, a fund transfer rate is determined on the basis of allocation of contribution to overall net interest margin of the bank. In pooled approach, individual pools are created to assign funds to a specific pool under some preset criteria. For instance, in a single pool approach, the fund transfer rate based on asset yields, favors the fund user's contribution to profitability. The rate that is assigned to one single pool is calculated on basis of actual interest rates (earned/paid) or on interest rates derived in market. The shortcoming of this method is that, it is carried out on the assumption that all funds bear equal importance when contributing to the bank. Hence, this approach fails to differentiate the value based on the attributes of funds deposited. Nor does it take into account the market conditions and the time of transaction, when calculating the fund transfer rate. However, in a multiple pooled approach, every little attribute concerning the fund, like its maturity, the time of deposition, and the market behavior is taken into account. Precisely, this approach is an extrapolation of the single pool approach. Here multiple pools are created, each spanning the maturity spectrum of the funds. The pools containing funds with longer maturity rate receive a long-term rate. Similarly, short-term funds have a shorter rate. With the help of this tool, profit contribution value (PCV) to the funds can be calculated by the formula:
What is it?
It can be defined as a method to determine the measure of lucrativeness contributed by each source of funding, which in turn is used to gauge the strong and weak areas of funding within the organization.
From the above definition, it is clear as to what this tool is about. But how does it help to measure the gains and also indicate the profitability of the various product lines and staff? The answer lies in calculation of the net interest margin on funds gathered by the bank. Banks are a depot of funds. Their business depends on funds received from their prospective customers and third parties. Most of the time, the funds are stored as deposits or are lent as loans or are used for making investments. The financial agreements between the bank and its customers define the amount, term, and rate of interest for the funds deposited or invested. The net interest margin which is calculated by this tool depends on the interest payments of the loans lent. Also, the contributions made to net margin and value are not always equal. So, this method helps in assessing the overall profitability of the bank on the basis of the net interest margin.
How to Calculate it?
All financial institutions like banks maintain a funds transfer pricing curve, which is calculated by plotting yield to maturity against time to maturity. From this graph, the rate of fund lending needs of each branch of the bank is calculated and compared. But what is the source of fund lending? Net interest income! The biggest and the primary measure of a bank's profitability is net interest income, which accounts for approximately 80% of a bank's revenue. This income is used as one of the sources of fund lending. When a bank has to lend money, it will loan the desired amount from the deposits made. Each deposit has a token value registered by the funds transfer pricing tool. And for every deposit, the loan catering to it has a cost assigned. Hence, this financial tool is an integral component of profitability measurement process, that helps in calculation of net interest rate margin (IRM). The net interest rates are assigned to all earning assets to reflect the source of funding within the bank.
IRM = Interest earned on the funds used for investments - Interest expense on funds deposited
The calculation is usually done by pooled approaches or specific assignment approaches. In both the methods, a fund transfer rate is determined on the basis of allocation of contribution to overall net interest margin of the bank. In pooled approach, individual pools are created to assign funds to a specific pool under some preset criteria. For instance, in a single pool approach, the fund transfer rate based on asset yields, favors the fund user's contribution to profitability. The rate that is assigned to one single pool is calculated on basis of actual interest rates (earned/paid) or on interest rates derived in market. The shortcoming of this method is that, it is carried out on the assumption that all funds bear equal importance when contributing to the bank. Hence, this approach fails to differentiate the value based on the attributes of funds deposited. Nor does it take into account the market conditions and the time of transaction, when calculating the fund transfer rate. However, in a multiple pooled approach, every little attribute concerning the fund, like its maturity, the time of deposition, and the market behavior is taken into account. Precisely, this approach is an extrapolation of the single pool approach. Here multiple pools are created, each spanning the maturity spectrum of the funds. The pools containing funds with longer maturity rate receive a long-term rate. Similarly, short-term funds have a shorter rate. With the help of this tool, profit contribution value (PCV) to the funds can be calculated by the formula:
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