Why Keeping Money In A Bank Can Actually Lose You Money

Keeping money in your bank is actually losing you money because the majority of banks often offer interest rates lower than the rate of inflation, and competing financial products that offer better rates. That's before any fees you might get charged for line of credit interest, extra check fees, multiple withdrawal penalties, ATM costs etc. If the money lost from opportunity cost, or money earned from higher paying financial instruments, is subtracted from this, the loss of money is even greater.

Numerically, inflation rates, also measured by the Consumer Price Index (CPI), vary depending on how it is calculated, the time of year, economic conditions and who you ask. Generally though, inflation averages between one and three percent based on Bureau of Labor Statistics (BLS) records. Bank savings account rates on the other hand, offer rates mostly fractional of inflation. For example, in July 2010, several brick and mortar  banks where paying less than half a percent in annual interest, whereas the average inflation rate between January and May of 2010 was 2.26 percent as per inflation data.(5)

• High yield savings accounts

Many financial instruments offer interest rates higher than savings accounts; an example of this is the high yield online savings account. These types of accounts are similar to savings accounts, but offer higher rates without withdrawal penalties or locked in savings. According to Money-Rates.com, the interest rates for some of these high yield savings accounts was in excess of 2%.(2) However, even at these higher rates, maintaining value rather than beating inflation isn't always the best option, and can lose higher interest earnings from other savings accounts.

• Peer to Peer lending

Peer to Peer lending sites like propser.com or lendingclub.com offer rates far in excess of what banks offer through their savings accounts. The difference between peer to peer lending and banks is that your lending money to people directly rather than through a bank. In this sense you make the same lending decisions as a bank loan officer yourself and are rewarded with a higher rate if the borrower doesn't default. Even the low risk borrowers can pay rates more than double the inflation rate.

• Investment strategy

Investment strategies involve utilizing financial opportunities that maximize potential returns and minimize risk. For those that are tolerant of some risk, investing money opens up a probability of higher earnings on savings. For example, an investor may wish to dollar cost average a blue chip high yield dividend fund while hedging with an inflation protected bonds or bond funds (3). Many different investment strategies exist that may prevent losing money in a savings account.

By keeping money in your bank, there's a good chance you are also losing money to the forces of a rising Consumer Price Index (CPI), and lost savings or investment opportunities. There are both low and high-risk ways to gain interest rates higher than a savings account; some of these such as high yield savings account, are even insured for loss through bank insolvency.

In the case of higher paying accounts that require money to be inaccessible for a period of time, sound financial management of one's finances pays off with higher interest rates. Savings accounts are just one way to hold money, but there are many more ways to allocate money so that it does more for you. To make the most of personal savings, identifying if the money is needed, and how much risk you are willing to take can mean the difference between half a percent and five or more percent in interest rate returns.

Sources:

1. http://bit.ly/4CnR5Z (Bureau of Labor Statistics)
2. http://bit.ly/NbZhc (Money-Rates.com)
3. http://bit.ly/aOfb6N (CNN Money)
4. http://bit.ly/wfvxD (Inflationdata.com)

An overview on new bank fees

Bank fees not constrained by banking regulation are on the rise according to reports across the U.S. Observers claim the new bank fees and fee increases are due to interest and fee restrictions imposed by the Credit Card Act of 2009. However, larger banks may also be trying to offset smaller profit margins and $50 billion in higher aggregate Federal Deposit Insurance Corporation (FDIC) fees arising out of the Financial Regulatory Reform law enacted in July, 2010.

Some of the new bank fees that are beginning to emerge are account transfer fees, inactivity charges and maintenance fees. These are bank fees that are new for some banks seeking to supplement revenue, but are not necessarily new types of fees. Additional fees pointed to by the NASDAQ stock exchange and Investopedia are minimum balance fees, overdraft protection fees, ATM charges, check fees and even miscellaneous fees.

Essentially, if it comprises a financial service and it's legal, there's little reason to think some financial institutions won't consider implementing new account cost structures. So which financial institutions are less likely to charge new bank fees and why? According to the Financial Reform law and the Baltimore Biz Journal, smaller community banks and credit unions are less targeted by the new financial reform law.  However,  a smaller financial institution such as a credit union with limited assets, is also more likely to issue smaller loans and provide more limited financial service options.

Ways to determine which banks are charging what fees, and if a financial institution is worth banking at include reading customer bank reviews such as the full reports at consumersearch, consulting the Federal Reserve Bank's website about Bank Accounts and Services, and mortgage loan shopping,  and by contacting financial institutions directly with questions. The Federal Deposit Insurance Corporation (FDIC) recommends keeping a close eye on banking correspondence and seeking alternative ways to receive the same services at lower cost such as withdrawing money with purchases rather than through an ATM. 

According to Qcitymetro, new and higher bank fees charged by Wachovia and Bank of America include paper statement fees with copies of canceled checks, printed account summaries, flat rate fees for some types of checking accounts, higher monthly account charges and fees for using ATMs from other banks. Still more fees to watch out for are paying credit cards off in full and line of credit fees. For example, HSBC bank charges its clients $10 for each day of overdraft protection used according to a September 25th report by Blake Ellis of CNN Money.

Sources: 

1. http://bit.ly/b3tOtN (FDIC)
2. http://bit.ly/aTYdIQ (U.S. Senate)
3. http://bit.ly/aV2TKG (NASDAQ)
4. http://bit.ly/bsmF7G (Baltimore Biz Journal)
5. http://bit.ly/cI6Uv2 (Qcitymetro)

Advantages of Interstate Banking For Personal Accounts

Interstate banking provides financial security, increases banking services, and provides more efficient, cost effective banking to clients with personal accounts. Moreover, advantages of interstate banking emerge out of increased competition and effectiveness among banks that have utilized interstate banking privileges and competitive financing options for consumers.

Improved and efficient interstate banking advantages was the reasoning for interstate banking back in the 1980's when banking deregulation was taking its early steps.(1)  By 1994, interstate banking had become a legislative reality with the passing of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994. (4)

• Interstate check deposits

Before interstate banking was allowed, interstate banks owned by the same company had to be subject to interstate agreements allow acquisition of the out of state banks, and  individuals could not make check deposits despite the interstate bank ownership.(2) Moreover, this restricted individuals from making deposits into their personal accounts at bank branches that did not have an interstate agreement even if they were owned by the same firm according to the St. Louis Federal Reserve Bank. Interstate deposits allow business people, travelers,  and people who work and live in different states more convenient banking options.

• Competitive interest rates

With interstate banking comes economies of scale, combining of banking assets for increased loan activity, and more competitive interest rates due to the cost savings banks incur from profitably expanding their operations across state lines.(3) In other words, when banks are able to lower their costs by efficiently branching out management across state lines the costs can be passed on to consumers through interest rates that attract more profitability for the bank and better returns for clients.

• More banking locations

A clear advantage of interstate banking is the number of possible branch locations at which banking services can be rendered to clients.(2) This convenience not only can increase banks revenue but also better facilitates interstate banking activities that can grow consumer wealth. For example, individual proprietors that can spend less time making deposits and taking care of personal/business banking transactions can also increase their efficiency, and potentially their profitability as well.

• Increased service options

Another advantage of interstate banking is increased services. These service can arise out of more resources that become available to the bank through interstate banking acquisitions and branches. (3) Additionally, a wider range of clientele also puts increased pressure on banks to provide a greater range of services. Examples of enhanced services may include personal account electronic banking, expanded loan products, and more voluminous transaction types.

• Financial security

In his book 'Banking Across State Lines' Peter Rose asserts Interstate banking can benefit consumers by improving financial security regarding funds within their personal accounts. More specifically, Rose claims that the consolidation of banks to form larger corporations tends to have a stabilizing affect on bank assets thereby better protecting consumers from bank insolvency. Even though bank deposits are insured by the Federal Deposit Insurance Corporation (FDIC), having to claim such insurance against lost assets is generally not a slight inconvenience, but rather potentially financially debilitating to banking customers who rely on one bank for all their banking needs.

Sources:

1. http://bit.ly/4xOpuh (Time)
2. http://bit.ly/dhZSRs (St. Louis Federal Reserve Bank)
3. http://bit.ly/c1I1pJ (Rose: Banking Across State Lines)
4. http://bit.ly/b2yGXU (FDIC)

A Guide to Bank Card Numbers

Bank cards include 1) automated teller machine (ATM) cards, 2) debit cards, and 3) credit cards. The use of the word bankcard in this article refers to one or more of the above types of cards. In some cases additional cards may be considered bankcards such as employee pay cards and unemployment insurance (UI) debit cards.

In all these cases, the cards have numbers on them that are used for a number of banking purposes including user identification, purchase security, protected use, and internal issuer classification(s). This article will discuss the types of bankcard numbers and their different uses.

Types of bank card numbers

1. Complete card number: The complete bankcard number itself is divided into number groupings that include 1) the issuer number, 2) the algorithm validity number and 3) the security check number. (merriampark.com)

2.  Account number: The account number on a bank card is usually around 9 digits in length. However, the length can vary between different cards or card types. The reason(s) for this variation in length include number of clients, issuer security standards, and varying internal codes and number classifications.

3.  Issuer number: The first digits in the card that typically 6 in number on the credit card identifies the bank or card issuer.

4.  Algorithm number: The numbers after the issuer number and before the last number that are used in verification of the card. This algorithm is used to prevent fraudulent creation of card numbers and often follows a simple key where every second number starting at the end of the number is doubled with the new number or 2 digit sum thereof placed beside the numbers that are not doubled. (theartofmakingmoney.com)

5. Check number: The last number of the card used to validate the card number via algorithm.

6.  Card Security Code(s) (CVC): The security code on some bankcards are numbers on the back or front of a card that add a layer of protection for the consumer. Security codes provide protection in cases where the numbers other than the card security code have been stolen. (securebmtmicro.com)

7.  Expiration date: Expiration date is simply the date in terms of day, month and year at which the card becomes invalid and cannot be used. Expiration dates can be 1 or 2 years from the date of issue and vary depending on the bank's policy. Expiration dates are used because

Bank card number applications

Bankcard number security is very important in protecting consumers and the economy. The combinations of card numbers and features help ensure theft and fraud are reduced by 1) increasing the amount of information a potential thief would have to obtain 2) complicating the creation of bankcard numbers, and 3) matching and confirming identity of user, account holder and issuer. As mentioned previously there are several specific uses for bankcard numbers.

User identification: The specific account number is unique to the account holder and thus helps identify and match the card number to the account holder.

Issuer identification: Bank card numbers also identify where the card account was originated. For example, the bank itself.

Purchase security: To assist the account holder, bank card numbers help prevent theft via 1) number of card number combinations, and 2) additional security code.

Fraud protection: Card issuers also protect themselves from fraud by using a specific number algorithm and number combination.

Bankcard number tips

Bankcard numbers involve more than just the numbers on the card. For the most part the bankcard numbers are for security and identification. To protect these numbers from theft or misuse it can be a good idea to practice a few methods of precaution, some of which are listed below. Bankcard theft, identity theft and bankcard fraud are all serious problems that can cause a lot of trouble if they occur. Taking the correct preventative steps help prevent these things from happening.

• Utilize secure websites for online purchases: Some websites do less to protect purchasers than others. Websites that use secure online purchasing will indicate this on their website.

• Separate numbers: Always keep pin numbers separate from the bankcard; card issuers repeatedly mention this with pin statements and new card information guides.

• Store number in a safe place: It goes without saying a bankcard should be stored in a place only accessible to its user. Otherwise theft of the card is easier for would be thieves.

• Shred statements and documentation: When documentation with card numbers and information are no longer needed, dispose of them safely by shredding them.

Sources:

1. http://www.thetaoofmakingmoney.com/2007/04/12/324.html
2. http://www.merriampark.com/anatomycc.htm#Account
3. https://secure.bmtmicro.com/resources/info/CVV.html

Investing in Tenancy in Common

Tenancy in Common is joint ownership of property where property ownership does not pass to other joint tenants in the event of death unless specifically stated through legal documentation. Joint tenancy in common is not the same as joint tenancy which is subject to 'rights of survivorship' by the other joint tenant(s) regardless of willed property.

Joint tenancy in common ownership can be subject to more extensive legal stipulations than more rudimentary forms of ownership. Taxation of property held in joint tenancy in common may also be regulated by different tax codes depending on the type of property.. Two typical examples of joint tenancy in common are illustrated below:

• Joint Tenancy of Real Estate: When two or more people have joint tenancy of a property they may both own a percentage share of the asset value of the home but not a distinct portion of the physical property.

• Liquid Capital Joint Tenancy: Unlike joint tenancy in housing, joint tenancy of liquid assets such as stock investments is not always subject to the same requirements. In this case joint tenancy may only imply joint ownership with no distinction of how much of the asset each owner owns.

Joint tenancy is subject to various benefits and disadvantages that are not typical of other types of asset ownership. These factors are ideally considered before entering joint tenancy contract(s) and are illustrated as follows:

Benefits of Tenancy in Common:

• Tax advantages: Joint tenancy in common has post-mortum tax advantages. That is, if one is planning from after (s)he dies, there can be an increase in the applicable property deductions an inheritor of the property is able to utilize. More deductions usually mean lower taxation.

• Leveraged Investment: Since joint tenancy is not full ownership it does not require the same amount of financing. This can allow one to become ownership in multiple properties, in affect leveraging the money one would have used for one home for ownership in several homes.

• Financing: Obtaining mortgages for joint tenancy may be easier due to the smaller amount of capital required. This can make home ownership a more realizable goal for those with less capital.

Disadvantages of Tenancy in Common

• Beneficiaries: Unlike in joint tenancy, joint tenancy in common may pass property onto heirs, beneficiaries or family members as with traditional ownership. While this may be an advantage to those stated in a will, it may be a disadvantage to other joint tenants who's interest do not match that of the new owner.

• Complication: Since joint tenancy may involve many owners, the rules of ownership can become complex as each owners interest must be represented and adhered to within the parameters of the contract.

• Financial Risk: If one owner in the joint tenancy experiences financial difficulties requiring a financial institution to seize assets or foreclose property this could adversely affect other joint tenants. This applies to joint ownership of both home property and liquid assets.

Items to Consider Before Joint Tenancy in Common

Joint tenancy is a form of asset ownership that requires certain prerequisites to ensure a financially stable ownership. Generally, this type of ownership should meet the following pre-conditions:

• Mutual Trust: Joint tenants ideally trust each other as they are more or less business partners.

• Financial Stability: Each partner in the joint tenancy will likely be more stable joint tenants if their financial situation is strong to begin with.

• Contract Specifications: To prevent future problems and complications, the tenants should have at least a verbal agreement as to how the property will managed and utilized. A written contract is preferable and more legally binding.

• Team Work: The larger the pool of tenants in the agreement, the more amount of cooperation and understanding may be needed. The ability to perform as a team could be beneficial in this type of ownership.

When making the decision to become a joint tenant it is important to realize it is not a solo venture and may involve some complex legal caveats and provisos. Knowing as much as possible before entering a contract of joint tenancy in common could be advisable to avoid mis-judgment or faulty ownership intention.

Having sufficient foreknowledge of potential circumstances is especially true in regard to real estate which can involve title issues, easements, mortgage insurance, natural hazards etc. The same freedoms and benefits of sole ownership are not present within a joint tenancy in common ownership. However, once the initial 'disadvantages' of joint tenancy in common are understood, this type of ownership agreement can be a potentially profitable and rewarding venture.

The Different Types of Banking Institutions

There are several types of banks in the United States however after banking deregulation in the 1990's some of the services previously prohibited to banks became available. This led to interstate banking and multi-functional banking.

Nevertheless, some banks retain their distinct roles and these represent the different type of banking institutions. Furthermore, banking in the future may change as evident in this banking report entitled 'The Future of Banking' by the Federal Deposit Insurance Corporation (FDIC)

Banking is multi-layered, multi-faceted nexus of institutions that provide for various levels of community, local, national and international finance needs and services. Banking is a fundamental cornerstone of an economy in which money and services are entrusted.

Many nations rely heavily on their banking systems to help manage their everyday personal, business, and financial management priorities. To illustrate the wide variety of banking and banking types a categorization of bank types follows:

• Retail consumer banks

Retail banks are those banks we are most familiar with. They provide savings accounts, checking accounts, small car loans, and credit cards. Retail banks are an essential part of any banking system as they allow a secure place within which to store and grow money. Retail banks are thus important to the banking system and the economy.

• Consumer operated banking services

Consumer banking can involve private banking such as that facilitated through Prosper.com through which private lenders and borrowers interact without the use of traditional banking means. However, the more common type of banks include local banks and Credit unions. The services provided by these banks are typically designed to meet everyday demands such as car loans, bill paying services, savings accounts, Individual Retirement Accounts, cashiers checks, money orders, electronic deposits and withdrawals and mortgages.

• Mortgage Banks

Although many consumer banks provide mortgage servicing, an example being Bank of America some banks specialize in this business. Included in this category are Real Estate Investment Trusts (REITS), Federally Subsidized Mortgage Financiers such as Freddie Mac and Fannie Mae, Public Mortgage lenders like Countrywide Financial Inc. and online banks such as Lending TreeAll specialize in different types of loans but often distribute their loans over various types such as Sub-Prime loans, Prime Loans and Alt-A loans. Mortgage banking can also be accomplished through online banks.

• Investment Banks

Investment banks such as Morgan Stanley primarily provide investment services such as financial planning, asset management and retirement forecasting and savings services. Although the role of banking institutions has changed with banking regulations, these banks still focus on the investment side of banking.

• International Banks

International Banking can involve very large amounts of money. Corporations and Banks borrow money from overseas banks in large quantities if the price is right. Overnight banking, exchange rate swaps, and interest rate hedging are some of the services utilized in overseas banking. At a larger scale are banks such as the World Bank and International Monetary Fund that finance countries and large scale developmental projects.

• Corporate Banking

Many corporations do banking of their own. They offer corporate bonds similar to Government bonds that can be only slightly more risky depending on the corporation providing them. An example of Corporate banking is State Farm Bank which provides banking services, credit cards and loans. Many corporations provide banking services in addition to their primary function to help facilitate business operations.

• Government Banking

The United States Federal Reserve Bank plays a major role in national banking. It is the hub for all retail banks in the United States. The Federal Reserve implements banking regulation, monitors money supply, sets interest rates and manages the Government's money. Government banking also includes mortgage banking such as loans administered by the Federal Housing Authority (FHA) and the Housing and Urban Development program (HUD). What's more, federal and municipal governments raise funds by issuing debt instruments such as bonds and treasury bills.

Summary

In summary, the above illustrations indicate the primary tasks and functions of banks and what sectors of the economy they serve. The scope and nature of these banks is generally more complex and involved than a brief description can illustrate. Also, other types of banking do exist as banking can become highly specialized.

An example of a niche banking experiment is micro-lending, a form of banking recently implemented in India on a large scale by the 2006 Nobel peace prize winner Muhammad Yunus of Grameen bank. In this type of banking very small loans are provided to poorer individuals with flexible loan terms to assist them in generating income from their skills and resources.

Banking is an ever evolving field that requires constant oversight, legislation and design as banking needs, technology and the business environment change. Our modern day Banking system is probably the most advanced the World has ever known and is truly a marvel of human organization.

Source:

Donald R. Fraser, Benton E. Gup and James W. Kolari. 'Commercial Banking: The Management of Risk 2nd ed' Cincinnati, Ohio. South-Western College Publishing, 2001.

The Importance of a Personal Relationship With Your Bank

A personal relationship with one's bank and banking officials can have significant advantages to cost savings, financing activities and financial goals. The reason this is so is because human nature tends to favor familiarity. This is evident in cultures across the world and in human history. Tribes, clans and affiliations create an ethos of trust, however small that is less likely to be present with unfamiliarity.

This same trust and familiarity can and does affect banking relationships in some instances. This article will discuss some of the benefits that may be obtainable from a strong banking relationship in addition to illustrating how a banking relationship can be improved and providing tips to consider when establishing or building a banking relationship.

Benefits of banking relationships

While not all banks will consider a banking relationship to be worthy of extra benefits, some do consider factors of the relationship to be worth consideration. A few of the advantages one might find with one's bank are 1) negotiating influence 2) improved credit rating and/or credit review by the bank and 3) extra consideration for loans and loan refinancing.

• Negotiating influence

If one has a strong banking relationship with one's bank this may allow one to hold sway when negotiable charges and fees are applied to one's account(s). For example, checking accounts with overdraft protection may still charge a fee for the overdraft service. This fee may be negotiable especially if one is familiar with and on good terms with one's bank. One may also be able to expedite processing of loan applications and/or adjustment of loan payment dates through a strong banking relationship.

Another area of influence clients with good banking relationships may have clout is in the provision of services. Clients after all are the bank's business and pleasing the bank's clients is simply good business practice. The stronger the banking relationship, the more likely banks and/or bank officials may be willing to go the extra mile to please the client. For example, banking products may be adjusted or redesigned to meet client's or groups of clients specific needs or free services may be added to the banking line of products.

• Credit rating

A strong credit rating comes about from good financial management and not a banking relationship. However, a relationship with one's bank may provide additional assistance in achieving a higher credit rating in addition to potential grace periods before reporting late payments to credit agencies. Furthermore, when applying for loans, a bank may overlook minor aspects of one's credit history and/or rating that other banks without which one has a banking relationship may consider as a negative factor in one's applications and/or delivery of banking services.

• Obtaining loans and refinancing

When one has a good relationship with one's bank, this creates potential to positively influence one's loan applications and refinancing. In other words, banks and bank officials often have a lot of paperwork to process, phone calls to make, accounts to balance, credit reports to review etc. This can cause loan application processing to be slowed and sometimes even stalled as banks too have limited financing capacity. In the presence of stalwart banking relationship, bankers and/or loan officers may be more inclined to expedite or speed processing and consideration of loan applications. The same principle may hold true for loan refinancing applications, and mortgages. Moreover, the more complex the banking activity is, the greater the potential a banking relationship has in the process.

• Financial planning and advice

Knowing and being familiar with one's bank and bank officials can also yield complimentary products and/or services. For example, one may obtain free financial advice that would otherwise be unmentioned or overlooked as relevant. Also, when a banking relationship is present, one may receive better service that can include financial planning or advice regarding banking products. A bank may also be more willing to be objective and honest about certain negative aspects of banking and bank products if a banking relationship involving some trust is present.

How to establish a banking relationship

To establish a banking relationship one might consider the things that make most relationships more functional. Things like respect, loyalty, and honesty can all be translated into the building of a banking relationship. For example, not switching banks every year despite potential better benefits at another bank. Moreover, if one has a good relationship with one's bank, simply pointing out the other banks benefits my cause one's own bank to reconsider certain products and/or terms of agreement.

Other ways to build a banking relationship include paying bills on time, going into the bank occasionally to perform transactions rather than using the ATM, chatting with bank managers and utilizing multiple banking services and loans. Banks favor clients with good account history, sound banking practices, and reliance on the bank for multiple banking needs.

These things demonstrate a willingness to work with the bank for more than just basic banking needs over time. Since banks are also businesses, clients who use more products are also more likely to be considered "good customers", which can influence bank relationships.

Tips to consider in banking relationships

Not all banks are the same and therefore, banking relationships can differ from bank to bank and in some cases be non-existent. For these reasons, it may be a good idea to consider various aspects of banks and banking relationship in order to maximize the potential benefits of that relationship. A few factors that one might consider are as follows:

• Bank size: The bigger the bank, the more difficult it may be to establish a personal relationship. This is so as volume of clients and paperwork can have a depersonalizing effect on the banking experience.

• Reputation of the Bank: Some banks may be more likely to consider client relationships relevant and important. Knowing a banks reputation can help one assess whether or not a bank is worth building a relationship with.

• Products and Services: Banks with personalized banking products may be more likely to demonstrate interest in client relationships. Furthermore, bank managers and staff that take client's needs into account when giving financial advice or offering financial services may be more in tune with the idea of banking relationships.

• Staffing and Turnover: If a bank has a high turnover or staffing changes, there may be internal problems or lack of concern for relationships within the bank. Banking turnover statistics can be obtained from observing the bank over time, directly from the bank or from online banking references.

• Location of Bank: The location of a bank can also help one determine how a banking relationship might turn out. If the bank is located in a busy downtown metropolitan area, it may be more difficult or take longer to become acquainted with banks located in quieter, less busy parts of town.

To summarize, banking relationships have potential to exiting and future clients for several reasons. This article has discussed some potential benefits of banking relationships in addition to providing ways a banking relationship may be established and tips to consider when building a banking relationship.

As with all relationships, banking relationships are not carved in stone and are subject to variability, non-existence and other factors. Nevertheless, the little effort that may be expended to foster a banking relationship may be worthwhile in terms of banking products and services, and overall banking experience which is often important to banks and clients of banks.

The difference between banks and credit unions

Banks and Credit Unions are both financial institutions that provide financial services, however several differences distinguish the two types of financial organizations. This article will discuss the difference between banks and credit unions in terms of four key areas 1) regulatory bodies, 2) primary interests, 3) deposit insurance, and 4) financial services. It will become clear through illustration of these differences, that banks and credit unions are indeed quite different from one another, and that different advantages and disadvantages stem from these differences.

• Regulatory legislation and agencies

Credit Unions are regulated by the Federal Credit Union Act of 1934 in addition to some shared regulatory legislation with banks such as the Fair Credit Reporting Act and The Depository Institutions Act of 1982. However, banks are regulated by the Federal Reserve Board and the Federal Deposit Insurance Corporations which credit unions are not. Moreover, credit unions are regulated by the National Credit Union Association (NCUA) , whereas banks are not. Some federal agencies and supervisory organizations such as the Office of Comptroller of Currency (OCC) and ,the Securities and Exchange Commission (SEC) may oversee aspects of both bank and credit union operations. Laws governing both U.S. banks and credit unions are codified in Title 12, of the U.S. code.

• Shareholder profit vs member ownership

The primary interests of a bank or credit unions are those parties who's objective(s), the financial institutions represent. For banks, the shareholders and owners are both influential and an important interest be they private or public, Credit Unions on the other hand are member owned and thus the members' interests are of primary interest. This is not to say there are no additional interests in these financial institutions as there may be administrative, employee, regulatory and commercial interests as well. However, since these latter interests may be common to both banks and credit unions, the difference in ownership interest is a more distinct difference of interest.

• Federal deposit insurance

A second difference between banks and credit unions are in how they are insured, and regulated. Bank deposits are insured by the Federal Deposit and Insurance Corporation (FDIC) whereas Credit Union deposits are insured by the National Credit Union Share Insurance Fund (NCUSIF). Both these organizations are Government chartered to protect both confidence in financial service institutions and the public's money through deposit insurance. Currently, in 2010, this insurance protects up to $250K of deposits for each account for both banks and credit unions; however this amount was originally intended revert back to $100K of insurance following the fallout from the 2008 financial crisis.

• Scale of financial services

Banks generally have greater legal, service, and financial scope. The financial services offered by banks and credit unions are largely the same, however the policy regarding these services can be quite different between the two due to the primary interests. Since banks are more concerned with profiting owners, bank members may be subject to more penalties, more service fees or surcharges, and higher interest rates whereas credit unions are more concerned with benefiting members who's interest is not paying more than they need to for services and financing. For example, a bank may charge for use of online banking and bill pay whereas a credit union may not if it can remain financially solvent and functional without such fees.

The difference between banks and credit unions can be good and bad for consumers. For banking clients, the number of service options, bank products and access to financing is generally higher, albeit mostly at a higher cost. However, credit unions are efficient and affordable for small loans, cash deposits and basic financial services. Many credit unions are also smaller and have members who often share a common interest such as place(s) of employment, and industry affiliation. In other words, credit unions are more individually, occupationally, and member focused whereas banks may be more commercially, profit and economically orientated.

The functioning of offshore banks

Offshore banks provide financial opportunities and services not necessarily possible or available in one's place of residence. Many people associate offshore Banking with gangsters and criminals trying to hide their money. To some extent these stereotypes are true but it is not the complete picture. Criminals may take advantage of the greater confidentiality to launder money and evade taxes, but law abiding banking clients may also benefit.

• Regulatory environment of offshore banking

Not reporting income earned in offshore banks is illegal in the United States as per U.S. tax code. However, several additional beneficial services and legal protections are facilitated by offshore banks. Fees and account maintenance expenses vary from offshore bank to offshore bank, but this information is generally available upon inquiry by the potential bank holder.

The reasons contributing to an offshore banks profitable operations include the unique advantages they have as 'offshore' Institutions. Often the countries they are located in do not heavily regulate them enabling them much freedom of service and lower operating costs associated with taxation.

In other words, the unregulated banking atmosphere in which these banks operate can increase their profit margin because they themselves may not have to pay high taxes and can charge rates and fees that are above typical. This can also make the banks more liquid, have great financial leveraging and offer potentially more profitable investment opportunities to international investors. In this sense the banking must comply with the national banking regulations in which the offshore bank is regulated and in terms of any applicable international laws.

• Offshore banking services

Services provided from offshore banks can include greater privacy, financial security and investment vehicles which may not be available to clients in their home countries. An example of some favorable investment vehicles not necessarily available at local banks include access to international markets according to Bahamasb2b.com Offshore banks have a lower operating cost environment due to less regulatory constraints.

The offshore banking environment allows its banks to operate in greater ease and with less fear of failure. In other words because these banks are not as heavily regulated as banks in developed countries such as the United States or Member of the European Union, they are not subject to the same constraints on fees, rates, legal reporting requirements, scope of services and associated operating costs. This freedom from regulatory constraint may allow them to offer better rates on loans and offer services not traditionally offered by local banks.

Offshore banks may not pay competitive interest rates on deposited money. Nevertheless, these banks can also offer asset protection from legal proceedings according to Shelter Offshore. Such protection enables individuals under litigation to protect themselves from total financial loss.

Individuals who are residents of countries with political instability can also benefit from offshore banks because they offer a safer environment to do banking. Offshore banking allows businesses that are registered in foreign countries to operate in a favorable tax environment. So a company that trades on an American Exchange does not necessarily have to operate solely out of the country in which the exchange listing is offered. The cost implications and benefits of such a business operation can make the difference between provability and loss.

• Where to find an offshore bank

Several countries offer offshore banking services and include panama, Bahamas, Bermuda and many others. Theoretically, money held in these banks can be frozen under international law that protect country's citizens from potential harm, and/or extreme criminal activity.

Some countries such as Anguilla have their banking law posted on the Internet. The link at the bottom of the page demonstrates this 'transparency' of operational activity but not necessarily transparency of the activities that occur under such law.

Due to the fact offshore banking has the potential to be vague in its reporting requirements this may also conceal the details of its financial success. For in investor placing money in such a bank, it is worth considering the stability of the bank in addition to the stability of the country in which the bank is located. Swiss offshore banks are recognized for their quality of service and relative stability in terms of the banking system within which they exist.

When considering whether to open an offshore bank, several factors may come into play with the decision. Items such as 1. quality of service 2. products and services, and 3. cost and ease of banking may all be pertinent concerns that offshore banks may or may not be able to meet.

Offshore banks exist to provide additional commercial revenue to the nation-states that allow for this type of banking via their national regulation. The services provided by offshore banks may not be available in one's home country or the offshore bank may offer security that one cannot easily obtain in one's own country.

Sources:
1. http://bit.ly/cHE3Vy (Yahoo Finance)
2. http://bit.ly/dtLqJP (ShelterOffshore.com)
3. http://bit.ly/a9c9Un (Bahamas Business to Business)
4. http://bit.ly/dbrxvh (Offshore Legal)
5. http://bit.ly/b9rLX8 (Targetwomen.com)

Bank accounts: Considerations when opening your first account

Knowing what to consider when opening your first bank account is a decision that you will have to live with as long as you utilize a bank account you have opened. There are a number of factors and considerations that may be useful and pertinent to the services and of the account. This article will discuss these variables in terms of 1) reasons to open a bank account, 2) banking products and services, and 3) additional items to consider.

A good reason to open a bank account at all is because bank accounts tend to have more protection from theft than do homes, and funds in a bank accounts are more likely to be insured without deductibles. For example, bank account deposits in the U.S. are insured by the Federal Deposit Insurance Corporation (FDIC) which requires no deductible as with many home owner's insurance and renter's insurance policies. In addition to the physical and electronic protection banks are able to provide, bank accounts also offer incentives, banking products and banking services to give existing and potential clients a good reason to open and/or continue banking with clients.

Reasons to open a bank account

When deciding to open a bank account thinking about personal financial needs and goals may be important. To do this, asking oneself questions like where is the bank located? how friendly are the bankers? and how easy is it to make use of the bank's services? may all be good questions to ask. In addition to these questions the following reasons may also be of assistance when choosing a new bank account:

• Helps manage bill paying, and employment payments
• Can assist with building a personal credit rating
• Establishes and/or builds a financial identity
• Facilitates other banking services available through the account
• Provides a sense of financial security

Banking products and services

When the different reasons to open a bank account have been made and the decision to open an account is in the affirmative, one may then begin shopping for a bank account. Different banks and financial institutions offer different incentives and benefits. Banks generally try to compete for clients which is good for someone looking for a new account. Some of the things that might be worth looking for in a first bank account include the following:

• No maintenance fees for checking or savings accounts
• Free first book of checks
• Low ATM charges for non-bank ATM usage
• Multiple branches and offices
• Reputation and credibility among friends and neighbors
• Financial reputation of bank within the banking community

New bank accounts sometimes give free gifts as an incentive for opening an account, however a new set of knives or a handy new cooler may not always be a great start to a new bank account, but rather a potentially unfortunate prelude to a banking relationship that didn't take into account what banking is really about.

While free gifts are nice, they generally shouldn't be the primary reason to choose a particular bank and/or bank account. Instead, one might consider aspects of banking that are going to assist one with a financial life that is easier and more manageable.

Additional items to consider

In addition to all the above free or low cost incentives are the banking products and services that make the account functional and useful. In other words, the more one can do with a new bank account the better. This can be especially true, if one has a lot of different financial obligations, and banking needs. A few such additional items that might be worth consideration in the search for a new bank account are the items listed below:

• Overdraft protection
• Credit/Debit Card with usage benefits
• Online Banking
• Free services and gifts
• Quality of Banking services

Opening a new bank account doesn't have to be a stressful experience, but might be best given some thought instead of just choosing the first bank one comes across near one's home or place of work. In other words, selecting a bank and bank account that meets one's financial expectations and provides products and services one finds useful can help make the decision to open a new bank account more fruitful.

Some of the reasons for choosing a new bank account in addition to various products and services that may be useful are provided in this article. When choosing to open a second bank account or open a new bank account altogether giving thought to the information in this article may be helpful in making one's banking experience more positive and financially beneficial.

History and functioning of commercial banks

Commercial banking is a field in which services are provided based on an individual or businesses financial capacity and ability. In other words when lending money banks look for several things to ensure their money is returned with interest. These factors include credit risk, assets, liabilities, payment history, credit rating, number of credit inquiries etc. In the case of a business loan a business plan is submitted to a loan officer and reviewed for potential profitability. If the business plan is sound and acceptable to the loan officer a loan contract is offered.

The business of commercial banking is competitive as many banks exist. This creates what economists call 'monopolistic competition' at the retail level and this is where pricing power is largely determined by market forces such as prime rate, competing loan rates, federal funds overnight rate and competitor rates. Sometimes commercial banks borrow money with rates in the 100's or the third decimal point in after the singles digit. For example, a bank may borrow money from another bank at a rate of 1.234% interest.

Commercial banking after the depression of the 1930s

After the Great Depression of the 1930's the Banks became heavily regulated to prevent another Depression from occurring. After time improvements in economic management allowed for deregulation of Banking which began around 1980. Since then new Banking legislation has given commercial banking more scope and ability to pursue expanded Banking functions. This enables banks to compete across banking services and improves banking functions as whole. Some of this recent legislation includes the Financial Services Modernization Act of 1999, the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, Omnibus Budget Reconciliation Act of 1993 and the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) (Fraser, Gum and Kolari p.44)

Competition in commercial banking

To compete commercial banks use a strategy combining advertising, interest rate adjustment, fees, market positioning, product positioning and a host of other factors relating to daily operational activities. With an increase in competition from Banking deregulation these services have become more refined and efficient. Bank performance can be measured using metrics such as ration analysis. Some of the more widely used ratios are Profit Rations such as Return on Equity (ROE), Return on Assets (ROA),; Risk Ratios such as 'Provision for Loss Ration, Liquidity and Operating Efficiency. (Ibid p.74-77). These ratios help clients, managers and investors determine the safety, security, profitability, efficiency and competitiveness of a bank.

Since banks have so much assets and liabilities how they manage these finances is crucial to their success. Combining fees, interest rates, and financial leveraging in profitable ways allows a bank to continue operating. If a bank has too much debt and not enough assets and that debt becomes faulty or delinquent in can damage a banks reputation leading to an undesirable bank performance rating. These ratings are measured and monitored by the Federal Deposit and Insurance Corporation (FDIC). They maintain statistics and analytics pertaining to commercial banks. The link at the bottom of this page is a gateway to a wealth of banking information.

Thus we have a brief overview of the Commercial Banking environment and how they function. Banks are highly specialized institutions whose main product is money. Money is a banks business and the business of their clients whether they be individuals, companies or countries. There are many laws and nuances to banking that create a nexus of commercial ingenuity and financial management that is highly evolved.

Sources:
1. Donald R. Fraser, Benton E. Gup and James W. Kolari. 'Commercial Banking: The Management of Risk'. Cincinnati, Ohio. South-Wester College Publishing, 2001.
2. http://www.fdic.gov/bank/index.html (Federal Deposit Insurance Corporation)