Key Question

What Is Banking?
 Learning Objective
To develop an understanding of what is meant by banking and what
the role of a bank is.

Success Criteria
• To identify the key purposes of a bank.
• To know some of the key terms associated with a bank and what
they mean.
• To understand what a bank statement is and be able to read it.

Why?
Developing an understanding of finance equips us with the knowledge
and skills we need to manage money effectively. It helps us to make
well-informed choices and encourages financially responsible
behaviour.
 What Is a Bank?
A bank is a financial institution that looks after your money. It is also
involved in borrowing and lending money.

There are traditional banks for individuals and commercial banks for
businesses.

You may also see building societies. They also look after funds and lend
money to the public. However, they are not as common as banks.

The main purposes of a bank are to:

keep money safe for customers;

help you pay for things;

lend money to companies, customers and homebuyers.

 What Is Banking?
Banks keep money safe for customers.

• Keeping small amounts of money in your pocket to pay for things makes
sense. However, holding larger amounts can be risky as there is a chance
your money could get lost or stolen.

• Banks make sure your money is kept safe. This role can even be traced
back to ancient Greek and Roman times!

• Many banks today offer a service to safekeep (look after) your money,
usually free of charge. In return, they can use the money stored with
them to earn a profit, by lending it to other people.
 What Is Banking?
Banks help you pay for things.

Banks provide debit and credit cards so you can pay for things in the shops
and online.

For example, when you use a card to buy something, the money is
transferred from your bank account to the bank account of the shop. The
same thing happens when you pay for things using your debit or credit card
online.
 What Is Banking?
Banks lend money.

Banks provide loans for many things, for example, to buy a house or to help
a business to expand.

However, lending money can be risky. Banks can lose out if someone to
whom they have lent money doesn’t pay it back. Banks know this, so they
try to make sure they earn enough profit by charging interest for lending
money.
 Interest
Interest is a charge for borrowing money. It is something you pay when
someone lends you money. It is usually worked out as a percentage, known
as the interest rate. For example, if you borrowed £10 with a 5% interest
on the loan, you would owe £10.50.

However, interest can also be paid to the account holder for keeping
money with a bank or building society. For example, you might get paid
0.5% interest based on how much money you have in an account. Interest
is paid on all savings accounts but, sometimes, it is also paid on current
accounts.

Interest rates can be applied over different periods, such as monthly,

quarterly, or bi-annually. However, in most cases, interest rates are applied
annually (once a year). Interest rates also vary so it is a good idea to shop
around and compare the interest rates that banks are currently offering.
 Overdrafts
Most bank accounts offer an overdraft facility.

An overdraft is an agreement with the bank which allows you to spend

more than the total balance in your account and go ’overdrawn’. It is a way
to borrow money short-term.

However, banks will charge you interest on your overdraft. You will need to
find out from your bank what your overdraft limit is and what interest you
will pay to borrow this money. If you’ve borrowed money through your
overdraft, the faster you can repay it, the less interest you’ll be charged.

You can pay your overdraft back by transferring money into your current
account. Even if you’re unable to pay it off in one go, transferring what you
can afford will reduce the amount of interest you’re charged, as interest is
calculated using your daily balance.

If you were to go overdrawn without the bank’s agreement, you may be

charged.
 Overdrafts
There are two different types of overdrafts: an arranged overdraft and an
unarranged overdraft.

An arranged overdraft is where your bank agrees an overdraft limit with

you. Arranged overdrafts typically come with an interest-free allowance (an
amount you can owe without being charged interest).

An unarranged overdraft is where you haven’t agreed an overdraft with

your bank but spend more than the amount in your current account.
Spending more than your arranged overdraft limit will also take you into an
unarranged overdraft.

It's important to remember that both types of overdraft have associated

charges, but you'll only pay interest if you use it. This interest charge is
dependent on your account.
 Bank Statements
A bank statement is a list of transactions (a record of money that has
moved in to and out of your account). It will also tell you your current
balance (the total amount of money in your account after all transactions).

A lot of banks now send bank statements online – usually, once a month.
However, banks also have mobile banking apps that will keep you
informed of your current balance and most recent transactions.

A bank statement will list transactions in date order. It will also show:

• who the transaction is made with;

• the amount as either a credit (money received into your account) or

a debit (money paid out of your account).
 Bank Statements
Credits (paid into
Date order your account)

Balance

Different codes for each transaction: Debits (paid out of

DD = Direct Debit DC = Debit Card your account)
SO = Standing Order ATM = Cash withdrawal
CR = Credit CQ = Cheque Details of
CH = Charges transaction
 Direct Debits and Standing Orders
You can arrange with your bank for a regular payment to be made from
your account to a company, for example, paying bills. You could also
arrange for an amount to be transferred to a savings account.

There are two ways to do this:

• Direct Debit
• standing order

You will need to make sure that there is enough money in your account to
cover the amounts to be paid by both Direct Debit and standing orders.
Otherwise, you may become overdrawn.
 Direct Debits and Standing Orders
A Direct Debit is an instruction from you to your bank or building society.
It authorises the organisation you want to pay to collect varying amounts
from your account – but only if you’ve been given advance notice of the
amounts and dates of collection.

Once you have agreed to those, the money is deducted automatically. If

the organisation you are paying wants to change an amount or date of
collection, they must tell you about it first.

Direct Debit is the simplest and most convenient way for you to pay
regular and occasional bills.​​It means you don't have to worry about
missing those important payments.
 Direct Debits and Standing Orders
A standing order is a regular payment of the same amount that’s paid on
a specified date. It allows the bank to take money regularly from your
account to pay another account. You can use a standing order for many
payment types, including:

• transferring money between your accounts;

• sending a friend or family member money on a regular basis;
• paying your rent or mortgage;
• donating to a charity.

You need to know the exact amount you want to pay out in advance. This
means standing orders may not be useful for bills, where the money owed
can go up or down. You can also change or stop a standing order at any
time.
 Direct Debits and Standing Orders
The main difference between a Direct Debit and a standing order is that a
standing order is always the same amount each month while a Direct Debit
can change each time.

For example, a phone bill might go up and down each month so this would
be paid as a Direct Debit. A rent payment is the same each month so this
could be paid using a standing order.

Another difference between a Direct Debit and a standing order is that you
set up a standing order personally, while the organisation you are paying
arranges a Direct Debit.

A standing order gives you more control as you can set it up, stop or
change it at any time. This is unlike a Direct Debit, where only the
organisation can make changes.
 Key Question

What Are the

Different Types of
Bank Accounts?
 Types of Bank Accounts
Managing a bank account is one of the things many people overlook when it
comes to their money.

Making sure you have the right one can save you money and help you keep
a track of things so you are more in control of your finances.
 Types of Bank Accounts
There are different types of bank account that you can use for different
reasons.

Banks and building societies will have two basic types of accounts:
• current accounts
• savings accounts

Each bank may have its own names for types of accounts within these
categories, but the basic principles remain the same. Originally, the main
business of building societies was savings accounts and mortgages,
but several institutions now offer a larger range of products, including
current accounts.
 Current Accounts
You can use a current account to help you manage your money day-to-day.
This includes:
• paying bills;
• receiving money, for example, money you earn from a job;
• keeping track of where your money is going.

Many current accounts are free but some will have a monthly or annual fee.
However, it’s important to remember that even if the current account is
free, it is likely there will still be fees and/or interest for an overdraft.

With a current account, you will get a debit card which you can use in shops
and cash machines. The bank may let you have an overdraft and access to
other kinds of credit. You will also be allowed to set up Direct Debits and
standing orders.
 Savings Accounts
You can use savings accounts to put away money that you'd like to save for
the future, for emergencies or to buy expensive purchases like a new car or
a holiday.

They do not offer the same access facilities as current accounts, such as
cheque books and cashpoint cards.

Savings accounts are intended for money to be paid in but not often
withdrawn. Some allow instant access to your money but others require
that you give the bank some notice before making a withdrawal –
otherwise, you could incur a penalty.

A savings account will normally pay you interest on your money. This is
usually at a higher rate of interest than current accounts, but these too can
vary so it is worth looking into before you open an account.
Accounts for Children and Teenagers
Many banks and building societies will let you open a current account from
the age of 11 (before this time, a parent or guardian may have opened a
savings account in your name which they looked after). However, before
you turn 16, you will need a parent, grandparent or guardian to do this for
you.

Children’s bank accounts don’t have overdraft facilities so this can be a

safe way to learn the basics of financial management before moving on to
an adult account.

Once you turn 18, you will be able to access a much wider range of current
accounts.
 Choosing the Right Account
Comparison websites can be a good starting point for anyone trying to find
a current account. Choosing a bank that is the best fit for your needs can
make it easier to handle your finances. You might want to think about:
• the type of bank account you want to open (do you want a current
account, savings account or both?);
• any additional bank services;
• interest rates – you may decide that a high interest rate isn’t an
important factor when choosing a bank but you like it for other reasons;
• any fees associated with the accounts.

Many banks may offer an incentive to entice customers into opening an

account. For example, a cash incentive, higher interest for a certain amount
of time or a monthly credit (usually around £5). However, it’s important to
look beyond any short-term offer and make sure that when it ends, the
account will still be the best for you.
 Choosing the Right Account
You should also think about how you would prefer to do your banking. For
example, do you like dealing with a person in a bank branch? Or would you
prefer the convenience of telephone or internet banking?

Not all banks will have a branch near you. When you’re looking for the right
account for you, check how the bank lets you use it and which ways are
important for you. For example, you might like to think about:
• telephone banking;
• internet banking;
• smartphone app;
• cashpoint machines near you that are free to use;
• branch service – if you like going into a branch, choosing a bank you can
easily get to will be important.
 Opening an Account
To open a bank account, you will usually have to fill in an application form.
Often, you can do this in a branch or online; sometimes, you can also do
this over the phone.

You will also have to provide proof of your identity including your full name,
date of birth and address. You must normally show the bank two separate
documents that prove who you are (for example, your passport) and where
you live (for example, a recent bill). These need to be original documents
and not photocopies.

A bank or building society can refuse to open an account for you.

Unfortunately, they don’t have to give you a reason. It’s important to note
that a bank or building society isn’t allowed to discriminate against you, for
example, because of your race, sex, disability, religion or sexuality. However,
there are some circumstances when they can discriminate against you, for
example, they may not let you open some types of account unless you fall
into a certain age group.
 Opening an Account
Before you open an account with a bank or building society, you should be
given information which will help you choose the account which best suits
your needs. You should be given information such as:
• details of all charges;
• how the bank or building society will give you information about your
account;
• any spending limits on your account;
• what to do if things go wrong.

After you’ve opened an account, you should be kept informed about

changes to this information. If there are changes to the terms and
conditions of your account, you can close the account at any time up to 60
days from the day you were told about the changes. You don’t have to give
notice or pay any extra charges.