Chapter 5: Financial Services

Savings Account

A savings account is an interest-bearing deposit account held at a bank or other financial institution.

 Because savings accounts pay interest but keep your funds easy to access, they’re a good
option for parking cash you’ll want in the short-term or to cover an emergency.
 In exchange for the ease and liquidity that savings accounts offer, you’ll earn a lower rate than
more restrictive savings instruments and investments might pay.

How Savings Accounts Work

Savings and other deposit accounts are important sources of funds that financial institutions can turn
around and lend to others. For that reason, you can find savings accounts at virtually every bank or
credit union, whether they are traditional brick and mortar institutions or operate exclusively online.
In addition, you can find savings accounts at some investment and brokerage firms.

The rate you’ll earn on a savings account is generally variable. With the exception of promotions
promising a fixed rate until a certain date, banks and credit unions can generally raise or lower their
savings account rate at any time. Typically, the more competitive the rate, the more likely it is to
fluctuate over time.

Some savings accounts will require a minimum balance in order to avoid monthly fees or earn the
highest published rate, while others will have no minimum balance requirement. So it’s important to
know the rules of your particular account to ensure you avoid diluting your earnings with fees.

Whenever you want to move money in or out of your savings account, you can do so at a branch or an
ATM, by electronic transfer to or from another account using the bank’s app or website, or by direct
deposit. Transfers can usually be arranged by phone, as well.

Types of Savings Accounts:

 Traditional or Regular Savings Account are what you may immediately think of when you
consider where to save. These are the savings accounts you typically find at traditional banks
or credit unions.
 Good for: People who need to save money for the short or long term and aren’t as
concerned about getting the best interest rate, expressed as the annual percentage
yield (APY).

 Pros
 It’s usually easy to open a regular savings account at a branch, and some banks
allow you to do so online.
 You can earn interest on your savings to grow your money.
 You can visit a branch if you need help or want to deposit cash.

 Cons
 The interest rates are usually on the low side, compared to other savings options.
 Monthly maintenance fees may cancel out interest earnings.
 Additional fees may apply for excess withdrawals.
 High-yield savings accounts are savings accounts that offer a higher APY, compared to regular
savings accounts.

 Online banks often offer high-yield savings accounts to attract savers who want to
earn a better interest rate than what is found at brick-and-mortar banks and credit
unions. This type of savings account may be appealing if you’re comfortable
managing your account through online or mobile banking versus visiting a branch.

 Good for: People who want to earn a more competitive rate on savings while
minimizing fees.

 Pros
 You could earn a much higher interest rate, compared to traditional savings
accounts.
 Online banks typically have lower minimum deposit requirements to open an
account.
 You’re less likely to be charged a monthly fee at an online bank.

 Cons
 No branch banking access means you can’t deposit cash directly into your account
at a branch.
 Transferring money between an online savings account and accounts at another
bank can take up to a few days to process.
 You may or may not have access to your money via ATM, depending on the bank.

 Money Market Accounts (MMAs) combine features of a regular savings account with features of
a checking account. You can find these accounts at both brick-and-mortar banks and online
banks.

 These accounts, which may also be called money market savings accounts or
MMSAs, allow you to earn interest on your savings. Rates are typically better than
regular savings accounts.
 You may also be able to write checks from your account or access funds with an
ATM or debit card.

 Good for: People who want to earn interest on savings while having more options
for accessing their money.

 Pros
 Money market accounts can offer better rates than traditional savings accounts.
 You may be able to write checks from your account or access your money using a
debit or ATM card.
 You can open money market accounts at traditional banks or online banks.

 Cons
 A higher minimum deposit may be required to open a money market account.
 Interest rates may be tiered, meaning you’ll need a higher balance to earn the best
rates.
 Banks may charge a monthly fee for money market accounts.
 Certificate of Deposit Account (CDs) are time deposits, meaning you agree to leave your
money in the account for a set period. During that time, your money earns interest and, when
the CD matures, you can withdraw your savings or roll it into a new CD.

 Good for: People who want to earn competitive rates and won’t need to access
their savings right away.
 You can find CDs at traditional banks and online banks.
 Between the two, online banks tend to offer better interest rates.
 CD terms typically range from as short as 30 days or as long as 60 months, with
longer terms usually boasting higher rates—although not always, especially in a
lower interest rate environment.
 Good for: People who want to earn competitive rates and won’t need to access
their savings right away.

 Pros
 CDs can offer above-average interest rates for savers pursuing short- or longer-term
goals.
 There are typically no monthly maintenance fees involved with CD accounts.
 CDs at online banks may offer lower initial deposit requirements.

 Cons
 Withdrawing money from a CD ahead of its maturity date may trigger an early
withdrawal penalty.
 CDs at traditional banks tend to offer lower interest rates than those offered by
online banks.
 Putting your savings into a longer-term CD makes it harder to capitalize on future
interest rate increases.

 Cash management accounts aren’t savings accounts per se. Instead, these accounts let you
hold cash you may plan to invest in a taxable brokerage account or a retirement account.

 Online brokerages and robo-advisor platforms may offer cash management accounts
to their investors. The money held in the account can earn interest, often at a
higher rate than what you’d get at a bank.

 Good for: People who want to keep cash available to invest in their brokerage or
retirement account.

 Pros
 They’re a convenient way to earn interest on money you plan to invest.
 Cash management accounts can offer benefits and features of both checking and
savings accounts.

 Cons
 High-yield savings accounts could offer better interest rates on the money you’re
saving.
 Since they’re attached to online brokerage accounts, you may not have access to
branch banking.
  Specialty Savings Account are designed to help you reach specific savings goals, rather than
being a catch-all for money you don’t plan to spend.

Example:

 Kids’ savings accounts

 Custodial savings accounts
 Student savings accounts
 Christmas Club savings accounts
 Home down payment savings accounts

 in some cases, they can be intended for a specific type of person, rather than a
goal.
 You can find these accounts at some banks, credit unions, brokerages or
investment companies. In the case of a Health Savings Account, you’d only
have access to one of those if you have a high deductible health plan.

 Pros
 They can help you save money for a variety of specific financial goals.
 Specialty accounts can earn interest to help you grow your money, just like
other savings accounts.
 Depending on the account, you may pay low or no monthly maintenance fees.

 Cons
 Some specialty accounts, such as IRAs, 529s and HSAs, have strict tax rules for
making withdrawals.
 The interest rates you earn for things like child savings accounts, student
accounts or Christmas Club accounts may be lower than high-yield or even
regular savings accounts.
 Specialty accounts may have restrictions on who can open them.

Multiple Savings Accounts for Multiple Goals

When choosing a savings account, it’s important to remember that you don’t have to pick just one.
Depending on what you want to achieve financially, you may decide to open multiple savings accounts,
CD accounts, money market accounts or specialty accounts. Just be sure to pay attention to the
interest rate you could earn and the fees you may pay, to be sure you find the best accounts for your
needs.

Checking Accounts

What Is a Checking Account?

A checking account is a deposit account held at a financial institution that allows withdrawals and
deposits.

 Also called demand accounts or transactional accounts, checking accounts are very liquid and
can be accessed using checks, automated teller machines, and electronic debits, among other
methods.
 A checking account is a deposit account with a bank or other financial firm that allows the
holder to make deposits and withdrawals.
  Checking accounts are very liquid, allowing for numerous deposits and withdrawals, as opposed
to less-liquid savings or investment accounts.
 The tradeoff for increased liquidity is that checking accounts don't offer holders much, if any,
interest.
 Money can be deposited at banks and via ATMs, through direct deposit or other electronic
transfer; account holders can withdraw funds via banks and ATMs, by writing checks, or using
electronic debit or credit cards paired with their accounts.

 Checking accounts can include commercial or business accounts, student accounts, and joint
accounts, along with many other types of accounts that offer similar features.

 A commercial checking account is used by businesses and is the property of the business. The
business' officers and managers have signing authority on the account as authorized by the
business' governing documents.

 Some banks offer a special free checking account for college students that will remain free
until they graduate. A joint checking account is one where two or more people, usually marital
partners, are both able to write checks on the account.

 A deposit is a financial term that means money held at a bank. A deposit is a

transaction involving a transfer of money to another party for safekeeping.

 A withdrawal involves removing funds from a bank account, savings plan, pension, or
trust.

 A debit is a payment made, or a payment owed. When money is taken out of your
checking account to make a payment, this is an example of a debit.

Time Deposits

A time deposit is an interest-bearing bank account that has a pre-set date of maturity.

 A time deposit is an interest-bearing bank account that has a date of maturity, such as a
certificate of deposit (CD).
 The money in a time deposit must be held for the fixed term to receive the interest in full.
 Typically, the longer the term, the higher the interest rate that the depositor receives.
 Time deposits are an extremely safe investment but they have a low rate of return.
 Time deposit accounts provide banks with the cash flow they need to lend money to other
customers.
 The bank makes a profit by lending the funds held in time deposit accounts for a higher
interest rate than the rate it pays on the time deposits.
 The bank may also invest the money from the time deposit in other securities that pay a higher
return than it is paying the customer.

 Pros
 Time deposits offer investors a fixed interest rate until maturity.

 Time deposits have various maturity dates and minimum deposit amounts.

 Time deposits pay a higher interest rate than regular savings accounts.
  Cons
 Time deposit returns are lower than that of other conservative investments.
 Investors may miss a better opportunity if interest rates rise.
 Depositors can't withdraw their money without a penalty.
 Fixed interest rates don't generally keep pace with inflation.

PHILIPPINE DEPOSIT INSURANCE CORPORATION

PHILIPPINE DEPOSIT INSURANCE CORPORATION (PDIC) is a government instrumentality created in

1963 by virtue of Republic Act 3591, as amended, to insure the deposits of all banks.

 PDIC exists to protect depositors by providing deposit insurance coverage for the depositing
public and help promote financial stability.

Types of financial Institutions

 Central Banks
 Central banks are the financial institutions responsible for the oversight and management of all
other banks.
 Individual consumers do not have direct contact with a central bank; instead, large financial
institutions work directly with the Central Bank to provide products and services to the general
public.

 Universal Banks
 Resource wise, these represent the largest group of financial institutions.
 These banks offer a range of financial services.
 The universal banks differ from commercial banks in ways that they have the authority to
engage in underwriting and other functions of investment houses and to invest in equities of
non-allied undertakings in addition to the functions of an ordinary bank.

 Commercial Banks
 The term commercial bank refers to a financial institution that accepts deposits, offers
checking account services, makes various loans, and offers basic financial products like
certificates of deposit (CDs) and savings accounts to individuals and small businesses.
 A commercial bank is where most people do their banking.
 Commercial banks offer consumers and small to mid-sized businesses with basic banking
services including deposit accounts and loans.
 Commercial banks make money from a variety of fees and by earning interest income from
loans.
 Commercial banks have traditionally been located in physical locations, but a growing number
now operate exclusively online.
 Commercial banks are important to the economy because they create capital, credit, and
liquidity in the market.

 Thrift Banks
 The system is composed of savings and mortgage banks, private development banks, stock
savings and loan associations and microfinance thrift banks.
 These banks are engaged in accumulating savings of depositors and investing them.
 They also provide short-term working capital and medium- and long-term financing to
businesses engaged in agriculture, services, industry and housing, and diversified financial and
 allied services, and to their chosen markets and constituencies, especially small- and medium-
enterprises and individuals.

 Rural Banks and Cooperative Banks

 These banks are well known and popular among rural communities in the Philippines.
 These banks play an active role in developing the rural economy by providing basic financial
services to the rural communities.
 These services can range from helping farmers through the different stages of production to
buying vehicles.
 The difference between the rural banks and Cooperatives is the way they are owned.
 Rural banks are owned and managed privately
 Cooperative banks are organized/owned by cooperatives or federation of cooperatives.

 Islamic Banks
 Islamic banking, also referred to as Islamic finance or shariah-compliant finance, refers to
finance or banking activities that adhere to Shariah (Islamic law).
 Two fundamental principles of Islamic banking are the sharing of profit and loss, and the
prohibition of the collection and payment of interest by lenders and investors.
 Islamic banks make a profit through equity participation, which requires a borrower to give the
bank a share in their profits rather than paying interest.
 Some conventional banks have windows or sections that provide designated Islamic banking
services to their customers.
 One key difference is that conventional banks earn their money by charging interest and fees
for services, whereas Islamic banks earn their money by profit and loss sharing, trading,
leasing, charging fees for services rendered, and using other sharia contracts of exchange.

 PROFIT AND LOSS SHARING (PLS) is the method utilized in Islamic banking to
comply with the prohibition of interest.

 The Islamic solution, commonly referred to as Profit & Loss Sharing (PLS),
suggests an equitable sharing of risks and profits between the parties
involved in a financial transaction.

 Internet Banks

A newer entrant to the financial institution market is internet banks, which work similarly to
retail banks.

 Internet banks offer the same products and services as conventional banks, but they do so
through online platforms instead of brick-and-mortar locations.

 Credit Unions

Credit unions serve a specific demographic per their field of membership, such as teachers or
members of the military.

 While the products offered resemble retail bank offerings, credit unions are owned by their
members and operate for their benefit.
  Savings and Loan Associations
Financial institutions that are mutually held and provide no more than 20% of total lending to
businesses fall under the category of savings and loan associations. Individual consumers use
savings and loan associations for deposit accounts, personal loans, and mortgage lending.

 The savings and loan association's primary purpose is making loans to its members, usually
for the purchase of real estate or homes.

 Credit Unions
 Credit unions serve a specific demographic per their field of membership, such as teachers
or members of the military.
 While the products offered resemble retail bank offerings, credit unions are owned by their
members and operate for their benefit.

 Investment Banks and Companies

 Investment banks do not take deposits; instead, they help individuals, businesses and
governments raise capital through the issuance of securities.
 Investment companies, traditionally known as mutual fund companies, pool funds from
individuals and institutional investors to provide them access to the broader securities
market.
 Robo-advisors are the new breed of such companies, enabled by mobile technology to
support investment services more cost-effectively and provide broader access to investing
by the public.

 Insurance Companies
 Financial institutions that help individuals transfer the risk of loss are known as insurance
companies.
 Individuals and businesses use insurance companies to protect against financial loss due to
death, disability, accidents, property damage, and other misfortunes.

 Mortgage Companies
 Financial institutions that originate or fund mortgage loans are mortgage companies.
 While most mortgage companies serve the individual consumer market, some specialize in
lending options for commercial real estate only.

Sources/References:

https://www.forbes.com/

https://www.investopedia.com/

http://www.pdic.gov.ph/

https://www.linkedin.com/pulse/types-financial-institutions-philippines-rahul-kumar/

https://www.ventureline.com/

Prepared by:

Lesley Allen D. Kabigting, MBA

College of Business Administration
Guagua National Colleges