Banking terms and concepts are many and can sometimes be difficult to comprehend, even for the industry professionals. However, since banking is a critical part of our business and personal life, it is helpful for consumers to learn some common banking terms. Here are essential banking terms every consumer should know.
Overdraft
Yes, you can call it “over withdraw”. This occurs when a customer withdrew more money from his bank account than the balance in the account. In simple term, it is another form of short term borrowing which attracts fees. These often costly charges can be avoided by keeping extra money in the account as a buffer. For individuals, you will not often need bank overdraft if you have practised some personal savings.
Collateral
This is typically a tangible asset used to secure a bank loan. If you fail to make payments on the amount you borrowed or accrued interest, the bank may be able to seize and sell the property used as collateral. An example of collateral would include land, house, car, stock and business machines.
Working capital
It is more like an accounting term, but the bank usually ask business borrowers to confirm their working capital need. It is used to describe the amount, by which the business current assets exceed its current liabilities. Some people describe it as the funds the firm has available to run its day-to-day business operations. Working capital can be well managed if one understands the working capital conversion cycle.
Working Capital conversion cycle
It described the dynamics of short-term cash flows that occur during the normal operations of a business. The working capital conversion cycle is the circular process starting with purchase of inventories on credit, then to sell those inventories in cash or credit and finally to carry the resulting accounts receivable that are the proceeds of the inventory. When the receivables are paid, the firm can then use the proceeds to either repay the debts or to start the cycle all over again by purchasing new inventories. It is desirable to keep the cycle as short as possible as it increases the effectiveness of working capital.
Money laundering
This is when money gained from a crime is put into a bank or any other legal business activities so that it can be accessed safely by the criminals and terrorists. It makes the proceeds of illegal activities easier to get to.
Standing order
A regular fixed payment made out of one account to another account or beneficiary. Standing order has helped many people to transfer funds from their current account to saving account as soon as they receive salary. It can also be used by business to make payment into an escrow account when their main account reaches certain limit.
Available bank balance
The amount of money in your account that is available for immediate use. If the account has no uncleared cheque or blocked fund, then the available balance should be the same as the total or book balance.
Book balance
The book balance is the term banks use to describe the amount of money in the account before any adjustments for cheques that have not yet been cleared. It is sometimes called the ledger balance.
When other bank’s cheque is deposited in a bank, it does not get available immediately. It takes about two to three business days in some countries.
Time or fixed deposit
An agreement to deposit a stated amount in the bank for a fixed length of time during which a fixed rate of interest will be paid (unless disclosed as a variable rate). Penalties are typically levied on the interest if the funds are withdrawn before the end of the agreed-upon period.
Inactive account
Sometimes called dormant account, it is an account in which there have not been any transactions for an extended period of time (does not include bank own entries).
Debit card
A plastic card that deducts money from the designated bank account to pay for goods or services. A debit card can also be used at ATMs to withdraw cash.
Cost of funds
The interest rate paid by financial institutions for the funds that they deploy in their business. The cost of funds is one of the most important input costs for a financial institution, since a lower cost will generate better returns when the funds are deployed in the form of short-term and long-term loans to borrowers. The spread between the cost of funds and the interest rate charged to borrowers represents one of the main sources of profit for most financial institutions.
Cash reserve
Bank reserves are the currency deposits which are not lent out to the bank’s clients. A small fraction of the total deposits is held internally by the bank or deposited with the central bank. Minimum reserve requirements are established by central banks in order to ensure that the financial institutions will be able to provide clients with cash upon request.
The main purpose of holding reserves is to avoid bank runs and generally appear solvent. Central banks place these restrictions on banks, because the banks can earn a much larger return on their capital by lending out money to clients rather than holding cash in their vaults or depositing it with other institutions.
Whether you visit the banks for small business relationship, personal banking or even for interview, it will be nice to understand few banking terms.
