Banks are in the business of credit and serve as financial intermediaries, bringing borrowers and depositors together. Banks also make bill paying easy and keep depositors’ money safe.

Is Banking for You?

An estimated 10 million American families do not have a deposit account at a bankAn institution, chartered by the state or federal government, that takes deposits and provides credit and other financial services. or other financial institutionBanks (sometimes called commercial banks), credit unions, savings associations, savings and loans. . The unbanked often get paid in cash or when paid by checkA written order to a bank to pay the amount specified from funds in your account. A certified check has been guaranteed by the bank upon which it is drawn and is so stamped. have to use check-cashing stores or informal systems like neighborhood grocers, their employers or their relatives to cash them. They choose not to use banking services for a variety of reasons based on their own personal situation and experience. Some of these reasons include:

  • they have had negative experiences at a bank or feel intimidated,
  • they do not want to pay a monthly bank fee,
  • they do not want to complete the paper work to open a bank account,
  • they do not want information about personal finances recorded,
  • they fear a tax lien on a bank account,
  • they like to use only cash or barter for goods and services,
  • they do not have required identification (e.g., a Social Security card),
  • they move often or are homeless and have no address.

Check-cashing fees

Check-cashing businesses cash paychecks for a percentage of the total amount of the check.

If you are paid $750 twice a month and the check cashing fee is 1.91% of your check (the legal maximum in NY state as of March 2012), you are paying $28.65/month or $343.80/year.

The average cost of maintaining a checking account is $5/month or $60/year. That’s a difference of $283.80 a year!


Check-Cashing Fee Comparison
Graph comparing annual expenses for checking account vs. using check cashing services
  • Check-cashing business fees
  • Monthly checking acct. fees

Consumers have the choice to bank or not to bank, but it is important to understand the disadvantages of choosing not to bank. Over time, paying check-cashing feesThe rate a check-cashing business can charge for cashing checks. Many states, including New York, regulate the rates. is more expensive than fees for maintaining a checking accountAn account that allows the customer to write checks on the money in the account. . Additionally, the unbanked often need to purchase a money orderA means for safe transmission of sums of money. Resembling checks, they are issued by governments (usually postal authorities), banks, and other qualified institutions to buyers who pay the issuer the face amount of the money order plus a service charge. Money orders can be used for purchases throughout the world. to pay certain bills, such as rent and utilities. Buying money orders repeatedly is also more expensive than purchasing a checkbook. If they need to borrow money, they will typically receive a higher annual percentage rate (APR)A rate that shows the total cost of credit annually. It includes a percentage of the principal as interest on a loan plus other costs (e.g., points on a mortgage loan, service charges). than they would at a bank. Fees and interestAn amount of money paid for using funds over a period of time, generally an annual percentage rate. Bank interest is both an amount paid to depositors of funds and a finance charge for money that is borrowed. The price that someone pays for the temporary use of someone else’s funds. Interest is also a compensation that someone receives for temporarily giving up the ability to spend money. charged for payday lending — cash advances against a customer's next pay check — can be in excess of 300%.

Banks offer a range of services that go beyond checking services. Banks also provide a way to establish credit, borrow money at a competitive rate and to earn interest on the money you have deposited with them in a savings accountAn account at a financial institution that earns interest and allows regular deposits and withdrawals. The minimum required deposit, fees charged, and interest rate paid vary among providers. . Furthermore, banks offer a secure place to keep your money. U.S. banks are supervised and regulated. Most — though not all — banks are insured by the Federal Deposit Insurance CorporationAn independent agency of the federal government that insures accounts up to $250,000 per depositor at almost all United States depository institutions. This deposit limit was increased from $100,000 by the FDIC in October, 2008, in response to the banking system crisis. The insured amount of $250,000 is effective through December 2009. The FDIC has primary federal supervisory authority over insured institutions that are not members of the Federal Reserve System. (FDIC) since it was founded in 1934. Deposits of up to $250,000 per depositorA person or entity that puts money in a bank or other institution. are covered in FDIC-insured institutions. Note that not every product sold by a bank or credit unionNot-for-profit cooperative of members with some common bond who, in effect, save their money together and make low-cost loans to each other. A financial institution. is insured.

Types of Banks

There are two major types of banking institutions: Commercial Banks and Credit Unions. They offer many of the same services including savings & checking accounts, and loans.

Commercial banks are found everywhere — small branches are located in supermarkets and malls. You can bank by using the mail, Internet, and phone. An automated teller machine (ATM)An ATM is a computer terminal activated by a magnetically encoded bank card, allowing consumers to make deposits, obtain cash from checking or savings accounts, pay bills, transfer money between accounts, and conduct other routine transactions as they would at a bank teller window. linked to your local account can make banking services available 24 hours a day in locations throughout the world. Banks compete like other businesses for customers by advertising and marketing their range of financial products and services.

Credit unions offer consumer banking services, financial products, and personal loans to their members. Credit union members are people who share a bond such as a common employer, organization, geographic area, or labor union. Credit unions operate as not-for-profit financial cooperatives and unlike banks, which operate for profit, are exempt from local and federal taxes.

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