MAB - Banking Services Lesson

Banking Services

Banks are Businesses

Banks offer their depositors a safe place to keep their money as well as an incentive in the form of paying interest. Banks then offer loans to customers at a higher rate of interest than they pay their depositors. The difference between the amount banks receive in interest from their customers and pay to their depositors is the spread or the net income a bank makes.

Bank Services for Businesses

Banks offer a variety of cash management services for businesses. Deposit services offered by banks include remote deposits, night deposit sites, tax depository services, and courier services. Remote Deposits are where a merchant scans a check and it is immediately deposited to the merchant's account, whereas a tax deposit service is where a business deposits taxes owed to the government. Banks also offer account management tools such as online banking. Most major credit card payments are processed through banks. The major service banks provide for businesses is commercial lending.

Commercial loans are made for four main purposes:

Real Estate

Businesses often need to acquire property to build on or as an investment. The process can often be long and involved because the property may need to be developed.

Construction

Businesses often need to build on the property they acquire and often construction loans are a part of the real estate package. Careful consideration must be given not only to the creditworthiness of the business but to the value of the building after construction.

Equipment

One of the biggest costs of starting a business is often the purchase of equipment.  This requires the loan officer to understand how the equipment will be used as well as the time frame for the equipment's usefulness.

Operations

Businesses need cash to meet expenses, make payroll, or purchase inventory. Banks often make short-term loans for these purposes. Factoring is one way banks assist businesses with operating expenses, by buying business receivables. 

Banks also offer risk management (insurance) and investment services to businesses.  Insurance products offered include commercial liability, long-term and short-term disability for employees, health insurance, property insurance, and workmen's compensation. Commercial Liability pays all or part of a claim against the company for causing harm. Workmen's Compensation pays for medical care for injured workers. 

Banking Services for Individuals

Banks offer a variety of services for individuals beyond checking accounts and savings accounts. Banks offer higher interest savings vehicles such as certificates of deposits and money market accounts. Certificates of Deposits are time deposits that are insured with a specific fixed term and usually with a fixed interest rate. Money Market Accounts are deposit accounts offered by a bank, which have a relatively high interest rate and typically require a higher minimum balance.

Bank loans for individuals include automobile loans, home mortgages, lines of credit, student loans, and home equity loans. Home equity loans are loans in which the borrower uses the equity in their home as collateral. 

Banks offer products and services to individual customers once only offered by non-depository financial institutions: insurance and investment services. Insurance seeks to pass the risk of financial loss from one individual to a great number of people and protect the holders against financial loss. Banks offer auto insurance, credit insurance, disability insurance, and life insurance. Credit insurance repays the balance on a loan if the borrower dies. Disability insurance pays the balance on a note if the borrower cannot work due to illness or injury. 

Banks also provide individuals with trusts services that range from retirement planning to estate planning. Estate is all real and personal property a person owns. Bankers, familiar with the legal and tax implications of both retirement and estate plans help individuals prepare to maintain their life style during retirement as well as pass on their property when they die. Banks with trust authority may also help customers set up trusts to protect their assets from taxes and extended probate. Probate describes the court proceedings that settle an estate. 

Self-Assessment

Try to answer the questions below as a review of the content for this lesson topic.

How do banks make money? 

By making loans

What is spread? 

The difference between the interest a bank charges for loans and the interest the bank pays for deposits.

Name some cash management services provided to businesses by banks. 

Remote deposits, night deposits, tax depository services

What are the four types of business loans? 

Real estate loans, construction loans, equipment loans, and operating loans

What is factoring? 

A company selling its receivables for cash

What is Workmen's Compensation?

Insurance that businesses buy to cover the expenses of an employee who is injured on the job. 

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