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8-10 Money, Banking & Financial Institutions [CH 8

Figure 8.2 The Operations of a Commercial Bank
Bank lends
money to
Bank receives Commercial
money from Borrowers Users
Depositors
Banks

Depositors Bank pays interest
to or establish
checking accounts Bank receives
for interest and
Depositors repayments from
Borrowers

Treasury bills. The investor in money market accounts can write checks against these
Money Market Accounts funds. However, the number of checks that may be written are generally limited to
Deposits that pay interest three per month.
rates very competitive
with those paid on other Money market mutual funds emerged in the high inflation years of the early 1980s.
short-term investments; These funds sold ownership shares to investors and used this revenue to purchase short
some allow a limited -term notes of government agencies and major corporations.
number of checks to be
written in amounts Credit Cards
exceeding $500. People frequently use their credit card as a substitute for currency and checks.
Credit cards are not a part of the money supply, but this plastic money represents an
individual’s credit standing. Names such as American Express, MasterCard and Visa
credit card
Plastic card used in making are widely known, used, and accepted around the world by nearly every business.
credit purchases; special They are a medium of exchange, but what they create is a use of credit; this is a unique
credit arrangement between credit arrangement between the cardholder and the financial institution that issues the
issuer, card holder, and card. Each time that the card holder uses his credit card, he is entering a short-term
merchant. loan arrangement for the amount of the transaction. This short-term loan can be repaid
when billed, or make the stated minimum amount each month; interest is charged on

the outstanding balance until it is paid in-full. Of the 1.12 billion credit cards in
circulation in the U.S., this represents that each household has on average six credit
cards. Credit cards have become very popular as a medium of exchange because of the
willingness of merchants to accept credit cards and financial institution recognizing
The Lowe's Credit Card is them for their profitability.
issued by Synchrony Bank. Merchants typically pay fees of 1 to 5 percent for credit-card sales by discounting
Synchrony Bank has more
than 80 years of experience their credit card sales to the bank; cardholders frequently pay an annual fee and
in the financial sector and interest charges between 9 percent and 27 percent on unpaid balances. As such, credit
it's one of the largest cards can generate profits three times as high as other bank services, and this
providers of private label profitability potential prompted American Express to develop its own Optima bank
credit cards in the United
States. The company works card and Lowe’s to create its own credit card.
with a large number of
retailers to support their The American Banking Industry: Their role in Business
credit card programs American business is served by several variations of the banking industry that

include commercial banks, thrifts, credit unions and even non-banking institutions
such as insurance companies, and commercial and consumer finance companies.
Commercial banks are a cornerstone of business and finance in the United States.
Commercial banks cater more to businesses rather than to individuals and provide

various services, such as accepting deposits, providing loans to businesses, and

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