Introduction to Banking: What is a

Bank?
When you think of a bank, what image comes to mind? A bank is a financial
intermediary for the safeguarding, transferring, exchanging, or lending of money.
Banks distribute “money” - the medium of exchange. A bank is a business and
banks sell their services to earn money, and they need to market and manage those
services in a competitive field. Learn more about the fundamentals of banking.

What is a Bank?

A bank is a financial institution and a

financial intermediary that accepts deposits and channels those deposits into
lending activities, either directly by loaning or indirectly through capital markets.

A bank may be defined as an institution that accepts deposits, makes loans, pays
checks and provides financial services. A bank is a financial intermediary for the
safeguarding, transferring, exchanging, or lending of money. A primary role of
banks is connecting those with funds, such as investors and depositors, to those
seeking funds, such as individuals or businesses needing loans. A bank is a
connection between customers that have capital deficits and customers with capital
surpluses.

Banks distribute the medium of exchange. Banking is a business. Banks sell their
services to earn money, and they must market and manage those services in a
competitive field. Banks are financial intermediaries that safeguard, transfer,
exchange, and lend money and like other businesses that must earn a profit to
survive. Understanding this fundamental idea helps you to understand how banking
systems work and helps you understand many modern trends in banking and
finance.
Banking is a Unique Business

The services banks offer to customers

have to do almost entirely with handling money or finances for other people.
Banks are critical to our economy. The primary function of banks is to put their
account holders' money to use by lending it out to others who are in need of the
same.

Money is a medium of exchange, an agreed-upon system for measuring the value

of goods and services. Once, and still in some places today, precious stones, animal
products, or other goods of value might be used as a medium of exchange. This
system was used for centuries, before the invention of money. People used to
exchange goods or services for other goods or services in return. This system is
also known as “Barter System” and an age-old method that was adopted by people
to exchange their services and goods. Roman soldiers were sometimes paid in salt
because it was critical to life and was a scarce commodity at those times.

Anything with an agreed-upon value might be a medium of exchange. Today,

many forms of money are used. Money is any object or record that is generally
accepted as payment for goods and services and repayment of debts in a given
socio-economic context or country. The main functions of money are distinguished
as a medium of exchange; a unit of account; a store of value; and, occasionally in
the past, a standard of deferred payment. Any kind of object or secure verifiable
record that fulfills these functions can be considered money. Money simply shows
how much something is worth, whether it is a new gadget that you can purchase or
two hours of your labor. When you have money, a bank can act as your agent for
using or protecting that money.
How Banks are created?

Banks and money are essential to

maintaining economies and they impact the entire societies and nations. Hence
they are closely regulated and strict procedures and principles are advised to be
followed by the banks by various authorities and governments. In the United
States, banks may be chartered by federal or state governments and in India
government decides the rules for opening any banks or its branches.

From a business structure perspective, most of the Banks are corporations or

cooperative societies and may be owned by groups of individuals, corporations, or
some combination of the two. Around the world, banks are supervised by
governments to guarantee the safety and stability of the money supply and of the
country.

Types of Banks:

Banks provide a multitude of financial

services beyond the traditional practices of holding deposits and lending money.
Commercial, retail, and central banks are three main types.

Understand the difference between the three:

Commercial Banks: Provide familiar services such as checking and savings
accounts, credit cards, investment services, and others. Historically, offered their
services only to businesses, including credit and debit cards, bank accounts,
deposits and loans, and secured and unsecured loans. Due to deregulation,
commercial banks are also competing more with investment banks in money
market operations, bond underwriting, and financial advisory work.

Retail Banks: Developed to help individuals not served by commercial banks.

Provide basic banking services to individual consumers. These institutions help
customers save money, acquire loans, and invest. They also offer a wide range of
financial services to a broad customer base. Examples include savings banks,
savings and loan associations, and credit unions and examples of products and
services include safe deposit boxes, checking and savings accounting, certificates
of deposit (CDs), mortgages, and car loans.

Central Banks: Banks formed, owned, and regulated by the government to

manage, regulate, and protect both the money supply and the other banking
institutions. Guarantee stable monetary and financial policy from country to
country. Typical functions include implementing monetary policy, managing
foreign exchange and gold reserves, making decisions regarding official interest
rates, acting as banker to the government and other banks, and regulating and
supervising the banking industry. Central banks serve as the government's banker.
Central banks issue currency and conduct monetary policy.
Benefits of Banking:

Safety: It’s risky to keep your money

in cash as it could be lost, stolen, or destroyed. Financial institutions keep your
funds safe.

Convenience: With banks, there's no need to carry cash. If you need cash, you can
easily access your funds virtually anywhere.

Security: Banks follow stringent laws and regulations and at most banks, funds are
insured.

Financial Future: As an individual, you'll have access to financial professionals to

help you. Knowledgeable advice of bankers is a valuable resource to help you
build a better financial future.

Introduction: What is banking and

why is it important?
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Banking is defined as the business activity of accepting and safeguarding money owned
by other individuals and entities, and then lending out this money in order to conduct
economic activities such as making profit or simply covering operating expenses.
A bank is a financial institution licensed to receive deposits and make loans. Two of the
most common types of banks are commercial/retail and investment banks. Depending on
type, a bank may also provide various financial services ranging from providing safe deposit
boxes and currency exchange to retirement and wealth management.
In the United States of America banks are regulated by the U.S. Federal Reserve Bank which
is one of the world's major central banks. Above all, central banks are responsible for
currency stability. They control inflation, dictate monetary policies, and oversee money
demand and supply in the market. Commercial or retail banks offer various services
including, but not limited to, managing money deposits and withdrawals, providing basic
checking and saving accounts, certificates of deposit, issuing debit and credit cards to
qualified customers, supplying short-and long-term loans such as car loans, home mortgages
or equity line of credits. Investment banks gear their services toward corporate clients.
They provide services such as merger and acquisition activity and underwriting among other
investment services.
in 2017, the Federal Deposit Insurance Corporation (FDIC) conducted a U.S national
survey (Links to an external site.) to estimate the number of unbanked and underbanked
American households. Survey executive summary revealed that approximately 8.4 million
U.S. household or 20.5 million individuals were unbanked, which means no one in that
household had a saving or a checking account.
Survey also indicated that approximately 24.2 million U.S. households or 64.3 million
individuals were underbanked, which means the household had an account at an insured
institution but also obtained financial products or services outside of the banking system.

But why is this important? because those who are unbanked or underbanked are hindering
their financial lives from enjoying services that lead to financial well-being. Many must
resort to services outside the banking system to cash checks or borrow loans and incur higher
transaction fees and interest unnecessarily. Here are some of the reasons why banking tops
the list of pillars required in financial literacy.

 Safeguard your cash

 Manage your finances – record keeping and budgeting
 Receive your paycheck quickly using direct deposit
 Facilitate financial transactions
 Insure your liquid assets
 Use debit and credit card services
 Earn interest
 Borrow loans
 Invest your money
 Establish a credit history to generate a FICO credit score instrumental in borrowing funds
and building wealth

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Chapter 1. Key terms you need to
know
Using the appropriate terminology in the business world can make or break a financial deal.
Hence, it is critical to understand the various terms used in banking to take full
advantage of the provided services, especially when shopping for a bank and needing to
compare before making financial decisions. For example, a checking account is totally
different from an interest-bearing checking account. A home mortgage loan is a different
loan than a home equity line of credit.

How to
Here is a summary listing of basic terminology and definition used by banks to conduct
financial transactions:

Checking account
Checking account is a specific bank account against which checks can be drawn by the
account depositor. Also called a "transactional" account used to pay bills, set up an
automatic transfer, or use a debit card. Depending on each financial institution, checking
accounts can provide features and restrictions. Be wary of minimum balance required to
open a checking account, the limited number of transactions allowed each month, fees
attached to each ATM withdrawal transactions, and monthly maintenance fee required. Your
goal is to find a bank or a credit union that provide a free checking account, free ATM
withdrawal transaction, and overdraft protection, and YES, such financial institutions do
exist!
Saving account
A saving account is a basic type of bank account that allows you to deposit money, keep it
safe, transfer money to checking account, and/or withdraw funds, all while earning interest.
It does not allow account holders to write checks or pay bills.

Certificate of Deposit (CD)

CD is a saving certificate with a fixed maturity date and specified fixed interest rate that can
be issued in any denomination aside from minimum investment requirements. A CD restricts
access to the funds until the maturity date of the investment.

Money market account

Money market account is an interest-bearing account, provides the account holder with
limited check writing ability. Thus, offering benefits of a combined saving and
checking account.

Online banking
Online banking is a method of banking in which transactions are conducted electronically
using a device such as a computer or a cell phone. Many banks and credit unions also offer
secure online banking services to their customers/ de facto owners.

Payroll direct deposit

Payroll direct deposit allows your employer to deposit your earnings electronically into
your bank account which allows you to get to your money faster than having to deposit a
paper check and wait for it to clear before you can access available funds.

Routing number
Routing number is used to determine where to route funds to or from for each financial
institution. Routing numbers of each financial institution are available to public and point to
the institution receiving funds.

Account number
Account number is the assigned number to each customer to indicate ownership. Employers
use both routing and account numbers to direct deposit payroll earnings in the correct
institution and employee's account. Safeguard your account number and use privately to
conduct financial transactions.

Read more: http://www.businessdictionary.com/definition/routing-number.html

Set of numbers associated with a checking, savings, or other bank account that associates a financial
institution with the account. This number is used to determine where to route funds to or from. Any
individuals seeking direct deposit from a company will typically have to provide a routing and
account number.

Read more: http://www.businessdictionary.com/definition/routing-number.html

Set of numbers associated with a checking, savings, or other bank account that associates a financial
institution with the account. This number is used to determine where to route funds to or from. Any
individuals seeking direct deposit from a company will typically have to provide a routing and
account number.

Read more: http://www.businessdictionary.com/definition/routing-number.htm

Debit Card/Credit Card

The difference between a debit card and a credit card account is from which source the cards
pull the money. A debit card takes money from your bank account (money that you have)
while a credit card is borrowed money charged to your account (money you must pay back
plus applicable interest).

Automatic bill payment and bill-pay

Automatic debit payments work differently than the recurring bill-pay feature offered by your
bank. In recurring bill-pay, you give permission to your bank or credit union to send the
payments to the company. With automatic bill payment or debits, you give your permission
to the company to take the payments from your bank account. Bill pay feature allows
customers to remain in control of scheduled payments.

Automated teller machine (ATM)

ATM is an electronic banking outlet that allows customers to complete basic transactions
without the aid of a branch representative or teller. Anyone with a credit card or debit card
can access most ATM machines, the amount is usually limited by day and transaction. Be
aware of transaction fees attached to using ATM by most institutions. Always seek free
services for your financial transactions to save money

Practice
Now that you know most used terminology by banks and credit unions, think of paying it
forward and discuss other terms you know with a friend or a family member!

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Chapter 2. What is a bank? What is a

credit union?
Have you ever wondered what is the difference between a bank and a
credit union? If yes, you are not alone.
Both banks and credit unions are financial institutions who offer financial services such as
accepting deposits, lending money, offering debit and credit cards, certificates of deposit, and
many other financial services. The main structural difference is the way in which the two
institutions make money. Banks function to generate profits for their shareholders. In most
cases, the need to make profit results in higher fees, but lower returns to consumers. Credit
Unions operate as not-for-profit organizations designed to serve their members who are
also de facto owners. They still must make enough money to cover operations, but not to
generate profit. This allows them to offer lower fees, accept lower minimum for opening
accounts, provide higher interest rates on savings, and lower borrowing rates.

How to
Here is a basic listing of characteristics of both banks and credit unions:

Banks

 Can be central, commercial, retail, and investment financial institutions

 Insured by the Federal Deposit Insurance Corporation
 Can have multiple locations (national and international)
 Eligibility to join has little restrictions to none
 Convenience and numerous ATM machines
 Sophisticated electronic banking technology
 Wide range of choices in services and products
 Profit-driven to satisfy shareholders
 They serve customers

Credit unions

 Can be federally or State chartered

 Insured by different insurance corporations other than FDIC
 Have limited locations by region or state
 Eligibility to join is restricted to individuals affiliated with certain groups
 Limited ATM locations
 Limited online banking services, depending on size
 Limited range of choices in services and products, depending on size
 not-for-profit driven to satisfy members/owners
 They serve members/ de facto owners
To a certain degree and depending on size, big banks tend to charge higher fees and rewards
lower interest on accounts compared to credit unions and community banks. But what credit
unions and community banks lack in bells and whistles, they make up for it in autonomy,
education, training and community involvement. As a consumer, it is your decision to
choose what best fit your needs and allow you to make sound financial transactions as most
types of banks and credit unions offer similar services in different delivery styles.

Practice
Now that you know the basic differences between a bank and a credit union, think of paying
it forward and discuss your banking needs with a friend or a family member!

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Chapter 3. How do you decide who

should safeguard your money?
You are the master of your money management. There is no right or
wrong in choosing a financial institution that fits your needs. Some decisions are organically
made for you such as geographic locations, availability of services, eligibility to join and your
personal needs. For example, a student attending college might find it easier to join a bank
that has a location near or on campus, or a financial institution endorsed by the university. It
does not have to be this way if the institution does not cater to your needs. A student's focus
should be on "FREE" services including free student saving and checking accounts, free
ATM withdrawals, and free online bill payment system. A young professional would need to
consider additional services offered by financial institutions and might be willing to pay
additional fees to reach his/her financial goals. Services such as loans, investment, retirement
plans, wealth management and other needed services are offered at varied cost which might
require additional research and shopping effort.

How to
It is safe to say that choosing a financial institution to manage one's money is an extension of
lifestyle, personality, value and belief systems, and knowing financial literacy principles of
saving and investing, and wants versus needs. For example, a community-oriented individual
prefers to shop locally, encourage small businesses, seek sustainability, and shies away from
large corporations, would most likely choose a community bank or a credit union to
safeguard his/her money. On the flip side, a city-oriented individual seeks global
connectivity, might travel nationally and internationally, would most likely choose a giant
bank with international locations and worldwide branches and ATM machines. The
challenge is to find an institution that satisfies one's needs and wants. Once found, building
relationships with financial institutions is usually for the long haul and in many cases
considered a long-term commitment.
Here is a list of questions to explore prior to searching for a financial institution being a bank
or a credit union:

 What is your lifestyle?

 What type of services do you need and want?
 What is your professional occupation?
 Which is more important to you, price or convenience?
 How long will you be at the current location?
 Are you seeking a temporary or long-term service?
 Do you prefer in person or online service?

These basic questions help you decide which financial institution better fits your needs. Once
you decide on parameters, you would be in a better position to shop, compare among what is
available till you settle on a favorite.

Practice
Now that you know the process for making decisions on how to choose the best fit financial
institution for your needs, think of paying it forward and discuss your banking choices with a
friend or a family member!

Chapter 4. What happens if you don't

use a bank or a credit union?
Can you still conduct financial transactions without having a bank or a credit
union account? of course you can, but your life would be more difficult and managing
your wealth more daunting. It also depends if your decision to disconnect from the financial
system is a temporary situation or a romantic notion to indefinitely live off the grid! A
temporary disconnect can be managed by relying on cash, prepaid debit cards, payday loans
or similar limited financial services. But if you decide to be unbanked or underbanked, be
prepared to face serious challenges in managing your money not to mention hindering
building assets and managing your wealth. Choices and options are limited and accompanied
by the risk of loss, theft or paying unnecessary fees to conduct financial transactions.

How to
Here is a list of possible challenges and limitations for individuals who are unbanked or even
underbanked:
Day-to-day expenses
Use of cash to buy food, gas and other items is acceptable in most places, but cash must be
safeguarded against theft or loss. You can always use a prepaid debit card in places that
accept plastic.

Paying bills without an account

Most vendors require payments by checks or credit cards such as utility and phone
companies. A few will allow a cash payment if delivered in person during work hours. Other
places might accept Western Union or money orders which can be purchased for a fee.

Cashing payroll checks

A payday loan, a mom and pop, a retail or a grocery store might offer a check cashing service
for a fee accompanied by the inherent risk of carrying cash.

Insuring your money

A great function of having a bank account is safeguarding your money. Banks and Credit
Unions are insured, but cash in your house or in your pocket is not.

Borrowing loans
A very difficult task without a bank account unless you are willing to borrow a payday loan
also known as "shark loan" with high interest or a car title loan against your vehicle. This
makes qualifying for a business or a mortgage loan totally out of the question.

Practice
Banking is a fundamental pillar of being financially literate. It is functioning within an
economic system that provides society with a structure to exchange services and financial
transactions. It is the first step in mapping your financial security and freedom and
safeguarding your money and your wealth. Now that you know options, limitations and
challenges of what happens if you don't use a bank or a credit union, think of paying it
forward and discuss your experience or the experience of someone you know with a friend or
a family member.
Chapter 5. Tips and ways for
students to get most of the banking
experience
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Students by large do not have a lot of money, even those who do, need to remain conscious of
interest charges and fees that can quickly deplete what funds they do have in their accounts.
Opening a bank account can be a first financial experience for many
students. Unguided, they might find such experience unpleasant or unsatisfying having
to navigate the many options offered by financial institutions. Luckily, most banks and credit
unions have realized the potential customer base they have in students' population. Most of
them offer students friendly financial packages to attract them and hope to keep them for a
lifetime.

How to
There are many tips and ways for students to get most of the banking experience if they focus
their search efforts toward students friendly and "FREE" services offered by many financial
institutions. Here are the basic criteria to sort through:

 Know the value of each institution in your location by researching available institutions
including online banking
 Know what you "need and want" in services from your financial institution
 Find an account with no monthly maintenance fee, negligible or no minimum balance
requirement, free debit card, free ATM usage, free online banking, free check writing,
overdraft protection, and no money transfer fees - the magic word for students if "FREE"
services
 Search for the highest interest rate on a saving account; unless required to do so, checking
and saving accounts do not have to be at the same financial institution - think of investing
early and watch your money grow!
 Consider the cost of convenience of using ATM machines, making deposits with ease and
paying bills online
 Know that you are free to use any bank account to deposit your financial aid refund
checks. Colleges are not legally allowed to influence students' decisions in banking
choices
 Get engaged in your community and seek trusted information prior to making financial
decisions - ask as many questions as you need before you decide
There are so many other ways for students to get most of the banking experience given time
and patience to know their campus, get involved with the community and explore available
businesses and services. At the end, banking is like other commodities and services; they are
competitive, and the winner gets to safeguard your hard-earned money. Treat this experience
with excitement but proceed armed with knowledge that awarding and being awarded is
based on mutual trust.

Practice
Now that you know the basic tips and ways for students to get most of the banking
experience, think of paying it forward and discuss other tips and ways with a friend or a
family member!