Cash Management and Other Services
Although deposits and loans are the basic banking services provided by banks and thrifts, these institutions provide a wide variety of other services to customers. For consumers, these include check cashing, foreign currency exchange, safety deposit boxes in which consumers can store valuables, electronic wire transfer through which consumers can transfer money and securities from one financial institution to another, and credit life insurance which automatically pays off loans in the event of the borrower’s death or disability.
In recent years, banks have made their services increasingly convenient through electronic banking. Electronic banking uses computers to carry out transfers of money. For example, automated teller machines (ATMs) enable bank customers to withdraw money from their checking or savings accounts by inserting an ATM card and a private electronic code into an ATM. The ATMs enable bank customers to access their money 24 hours a day and seven days a week wherever ATMs are located, including in foreign countries. Banks also offer debit cards that directly withdraw funds from a customer’s account for the amount of a purchase, much like writing a check. Banks also use electronic transfers to deposit payroll checks directly into a customer’s account and to automatically pay a customer’s bills when they are due. Many banks also use the Internet to enable customers to pay bills, move money between accounts, and perform other banking functions.
For businesses, commercial banks also provide specialized cash management and credit enhancement services. Cash management services are designed to allow businesses to make efficient use of their cash. For example, under normal circumstances a business would sell its product to a customer and send the customer a bill. The customer would then send a check to the business, and the business would then deposit the check in the bank. The time between the date the business receives the check and deposits the check in the bank could be several days or a week. To eliminate this delay and allow the business to earn interest on its money sooner, commercial banks offer services to businesses whereby customers send checks directly to the bank, not the business. This practice is referred to as “lock box” services because the payments are mailed to a secure post office box where they are picked up by bank couriers for immediate deposit.
Another important business service performed by banks is a credit enhancement. Commercial banks back up the performance of businesses by promising to pay the debts of the business if the business itself cannot pay. This service substitutes the credit of the bank for the credit of the business. This is valuable, for example, in international trade where the exporting firm is unfamiliar with the importing firm in another country and is, therefore, reluctant to ship goods without knowing for certain that the importer will pay for them. By substituting the credit of a foreign bank known to the exporter’s bank, the exporter knows payment will be made and will ship the goods. Credit enhancements are frequently called standby letters of credit or commercial letters of credit.
In recent years, banks have made their services increasingly convenient through electronic banking. Electronic banking uses computers to carry out transfers of money. For example, automated teller machines (ATMs) enable bank customers to withdraw money from their checking or savings accounts by inserting an ATM card and a private electronic code into an ATM. The ATMs enable bank customers to access their money 24 hours a day and seven days a week wherever ATMs are located, including in foreign countries. Banks also offer debit cards that directly withdraw funds from a customer’s account for the amount of a purchase, much like writing a check. Banks also use electronic transfers to deposit payroll checks directly into a customer’s account and to automatically pay a customer’s bills when they are due. Many banks also use the Internet to enable customers to pay bills, move money between accounts, and perform other banking functions.
For businesses, commercial banks also provide specialized cash management and credit enhancement services. Cash management services are designed to allow businesses to make efficient use of their cash. For example, under normal circumstances a business would sell its product to a customer and send the customer a bill. The customer would then send a check to the business, and the business would then deposit the check in the bank. The time between the date the business receives the check and deposits the check in the bank could be several days or a week. To eliminate this delay and allow the business to earn interest on its money sooner, commercial banks offer services to businesses whereby customers send checks directly to the bank, not the business. This practice is referred to as “lock box” services because the payments are mailed to a secure post office box where they are picked up by bank couriers for immediate deposit.
Another important business service performed by banks is a credit enhancement. Commercial banks back up the performance of businesses by promising to pay the debts of the business if the business itself cannot pay. This service substitutes the credit of the bank for the credit of the business. This is valuable, for example, in international trade where the exporting firm is unfamiliar with the importing firm in another country and is, therefore, reluctant to ship goods without knowing for certain that the importer will pay for them. By substituting the credit of a foreign bank known to the exporter’s bank, the exporter knows payment will be made and will ship the goods. Credit enhancements are frequently called standby letters of credit or commercial letters of credit.