=Intro bookend= Hi. In this video, we will start talking about the services offered by modern banks as financial intermediaries, focusing on transactional services and the features of checking accounts. =Learning objectives= After this lesson, I hope you will be able to do the following: * Describe the role of banks in facilitating transactions. and * Explain the functionality of a checking account and a check transaction. =Banks= Previously, we have discussed how banks have arisen to become financial intermediaries, facilitating the transfer of money between people at great distances with speed, convenience, and safety. Let's look into the details of how modern banking works and the services banks provide to their customers. =Bank services= Banks today provide a wide variety of services, in addition to the basic transactional ones we have talked about so far. For the moment, we will focus only on transactional services. We will discuss savings, investments, and loans in due course. =Transactional services= Transactional services are those that facilitate conducting monetary transactions between counterparties. We will discuss the core features of deposit or checking account and the check writing and clearing privileges that come with it, debit cards, bank wires, automated clearing house or ACH transfers, ATMs, and bill pay services. =Checking accounts and checks= The deposit or checking account is the core transaction service offered by banks. This account allows you to deposit money at the bank, and use it for various transactions once it is there. You can of course also withdraw the cash if you need it. Without having at least a checking account at the bank, you will not be able to take advantage of any of the other transactional services offered by the bank. The check writing and clearing service is on its way to becoming obsolete, being replaced by purely electronic methods of payment, but this is where the "checking account" gets its name. A check is a paper-based way of sending money, where you fill out a specially formatted form, called a "personal check", and write down the recipient's name, the amount you want to transfer, the current date, and your signature. Sender's bank information is usually pre-filled. Checks have remained essentially unchanged over the past two hundred years. Compare the image of the check made out to Thomas Jefferson in 1809, above, with the image of a modern check, below. Note that both have the date field, the payee name, the amount paid, expressed in words and in numbers, and the payer's signature. The modern-day additions are the check number at the top, repeated again below, the bank routing number, and the payer's account number. In the old days, you had to pay a monthly fee for the convenience of having a checking account. These days, if you're careful and shop around, you should be able to get a checking account with no monthly fees, or fees that get charged only if your average daily balance during the month falls below some designated minimum. =Check transaction= Let's see how a check transaction would work. Imagine we have two people, Alice and Bob, and they each have a checking account at a bank. Bob has agreed to sell a cellphone to Alice, in exchange for some money, paid by check. So Alice fills out and gives the check to Bob, and Bob brings it to his bank for deposit. Now the check clearing process begins. Bob's bank asks Alice's bank whether she has enough money in her account to honor the check, and if so, to transfer the money over. Alice's bank replies that the check is good and the money clears. Bob is notified, and can now safely give the phone to Alice, knowing that he's been paid. =Quiz 1= Note that there's nothing preventing someone from writing a check for an amount they cannot actually honor - anyone could write a check for one million dollars, while having only 100 bucks in the account. Now, take a guess, what happens if someone writes you a check for 500 dollars, but they only have 400 bucks in their account? =Bounced check= If the check writer's account does not have sufficient funds, the check is rejected after the clearing process, and the receiver gets nothing. This is called a 'bounced check', also known as a 'rubber check'. Because rubber bounces, get it? It gets even better, though, because if a check you deposit bounces, your bank will charge you a "returned item fee", and the sender's bank will charge the sender an "non-sufficient funds fee", and everyone but the banks has a bad time. You can see that it is very important to wait for the check to clear before delivering the goods, if you are dealing in an arms-length transaction with someone you do not know. =Debit cards= A debit card is another way to draw on your checking account. By swiping your card at an electronic point of sale terminal at a merchant that accepts card payments, you can transfer money from your account to the merchant's account entirely paperlessly. Most banks offer a debit card to checking account holders at no extra charge. How does the bank make money on this? The bank charges the accepting merchant a fee for every transaction. =Bank wire and ACH= Bank wires and automated clearing house or ACH transactions do essentially the same thing - transfer money electronically from source bank to target bank, upon request of the payer. For instance, if Alice wants to send some money to Bob, she can contact her bank, either in person, by phone, or via the internet, and request them to send some money to Bob's bank. The money gets transferred, Bob sees it in his account, and the transaction is complete. There are some important differences between the two, though. First, wire is usually completed the same day or the next business day, while ACH takes 3 to 4 business days to clear to the receiving account. So for instance, if you send payment via ACH on Friday, the recipient will only see the money in their account on Wednesday or Thursday. With a wire, the recipient will have the money that same day, or at the latest on Monday. Second, there's the difference in cost. Wires come with pretty hefty fees attached - 20 to 50 dollars on the sending end, and the same on the receiving end. So you clearly wouldn't want to use this method if you only need to send like 100 bucks - the fee would be egregious as percentage of transaction amount. Third, bank wires are capable of sending money anywhere in the world, while ACH is a US only domestic transfer method. Due to the differences in the cost of transaction, you can see that wires are generally not used by individuals for day to day transacting. You'd only spring for the high cost of wire if you REALLY need to clear the payment fast, or if you are sending money internationally. Finally, since wires are relatively infrequently used, to initiate a wire transfer, you usually have to show up at the bank, or at least fill out and send in some forms with the information on the transaction. To set up an ACH payment, you can just go to the banks' website and send the payment via the bank's online billpay functionality. Online billpay, or "electronic bill payment", is a feature most banks offer these days with a standard checking account. There was a time when you had to pay an extra monthly fee for the convenience, but due to competitive pressures, it is now easy to find banks that offer it for free. We will get back to online bill pay later on in the course, but for now let's just say that it is a pretty good idea to take advantage of the free service. =ATM= Automated teller machines, or ATMs, have been around since the 1960s. They were a great innovation in improving the accessibility of bank accounts, since there was no internet, and banks used to only be open to the public from around 10 am to around 2 pm. This is the origin of the term "banker's hours". Though ATMs have a number of features, like checking your balances, transfering funds between your accounts, and even making deposits, the really important feature is that of taking cash out. Most of the time, your debit card also serves as your ATM access card. Almost always there is no fee to use an ATM that belongs to your bank, but if you use an ATM belonging to another bank or network, you'll often get charged a fee. In fact, depending on your bank, you may get charged a fee twice: once by the ATM operator, and again by your bank for using a third party ATM. Ouch. =Online banks= With a traditional, so called "brick and mortar" bank, there are physical branch offices where you can walk in and interact with the tellers to conduct your business. These days there are also so called "online banks". You interact with your bank account at an online bank only via mail, internet, and ATMs. Often, because the online banks don't have the extra costs of maintaining a branch network, paying a bunch of employees, and other associated costs, they charge lower fees, and generally offer more favorable terms. So, if you find yourself comfortable doing everything remotely, without physically walking into a branch, an online bank account can be a good choice, either as your only bank account, or as a supplement to an account you might have in your local brick and mortar bank. =Additional reading= This concludes our overview of checking account functionality. I hope you found it useful. For some more information, the wikipedia article on transaction accounts is a good start. Next, we will talk in more detail about the fees associated with these services, and what you can do to avoid them. =Attributions=