Lesson 4a: Understanding Financial Products 

Section 1: Introduction

Banks as Businesses

In previous lessons, we explored the basics of bank accounts and how banks and credit unions operate in Saskatchewan. Now, we will take a deeper look at financial products—the services that banks sell to their customers. Just like companies such as Apple and Nike sell products for a profit, banks are businesses that sell financial products to make money.

When people think of banks, they often imagine a safe place to store their money. However, banks do not just hold money—they offer products like chequing accounts, savings accounts, loans, credit cards, and mortgages to customers. These financial products help people manage their money, but they also generate profit for the bank.

How Do Banks Make Money?

Banks earn billions of dollars each year in Canada. According to financial reports, the largest Canadian banks make over $50 billion in profit annually. But how do they do this?

There are three main ways banks make money:

1. Interest Income – Banks lend money to customers through loans, mortgages, and credit cards. In return, customers must pay back the loan with extra money (called interest). The higher the interest rate, the more money the bank makes.

2. Fees – Banks charge customers for using their financial products. These fees include:

   • Monthly account fees for chequing accounts.

   • Overdraft fees when a customer spends more than they have.

   • Transaction fees for certain debit card or credit card purchases.

3. Investments – Banks use customers' deposits (from savings accounts and chequing accounts) to invest in stocks, bonds, and other assets. The bank earns money on these investments, often at a much higher rate than the interest they pay to customers.

Why Does This Matter?

Understanding that banks are businesses is important because it helps people make better financial decisions. When you open a bank account, apply for a credit card, or take out a loan, you are buying a financial product. Just like when shopping for a phone or a pair of shoes, it is important to compare options and choose the best financial product for your needs.

By learning how banks operate and how they make money, you can:
✅ Avoid unnecessary fees that banks charge for certain accounts and transactions.
✅ Make smart choices about savings accounts, loans, and credit cards.
✅ Understand interest rates and how borrowing money can cost more in the long run.

In this lesson, we will explore different financial products that banks offer, how they work, and what to watch out for when using them.

Section 2: What Are Financial Products?

Definition of Financial Products

A financial product is a service that helps people manage, save, borrow, or invest money. Banks and other financial institutions sell these products just like companies sell physical goods. Instead of selling shoes or smartphones, banks sell chequing accounts, savings accounts, debit cards, loans, mortgages, credit cards, and investment products.

When someone opens a bank account, applies for a loan, or uses a credit card, they are buying a financial product. These products make it easier for people to handle their money, but they also allow banks to generate profit.

How Do Banks Make Money from Financial Products?

Just like businesses that sell physical goods, banks earn money when people use their financial products. They do this in three main ways:

1. Service Fees – Many financial products come with fees, such as:

   • Monthly fees for chequing accounts.

   • Transaction fees for debit card use.

   • Overdraft fees when spending more than what is in the account.

2. Interest Charges – Banks charge interest when they lend money. The most common examples are:

   • Loans – Personal, student, and auto loans all charge interest.

   • Mortgages – Home loans require regular payments with added interest.

   • Credit Cards – If a person does not pay the full balance each month, they must pay high interest on the remaining amount.

3. Investments – Banks use customer deposits (from chequing and savings accounts) to invest in stocks, bonds, and other assets. They earn profits from these investments, often at higher rates than the interest they pay to customers.

Why Understanding Financial Products is Important

Financial products are essential for managing money, but they can also be expensive if people do not understand how they work. Being informed helps people:
✅ Choose the right bank account to avoid unnecessary fees.
✅ Use credit cards wisely to avoid high interest charges.
✅ Compare loans and mortgages to find the best deal.
✅ Invest safely by understanding the risks and rewards.

By knowing how banks earn money from financial products, customers can make better financial choices and avoid costly mistakes.

Section 3: Chequing Accounts – A Daily Use Product

What is a Chequing Account?

A chequing account is a financial product designed for everyday spending. It allows people to deposit money, pay bills, withdraw cash, and make purchases using a debit card. Most people receive their paycheques directly into a chequing account and use it for daily transactions.

Unlike savings accounts, chequing accounts do not usually earn interest because the money in them is meant to be spent rather than saved.

Common Features of Chequing Accounts

✔ Debit Card Access – Linked to the account for making purchases and ATM withdrawals.
✔ Direct Deposit – Employers can deposit paycheques directly into the account.
✔ Online and Mobile Banking – Customers can check balances, transfer money, and pay bills using an app or website.
✔ Bill Payments – Allows users to pay rent, utilities, and other bills electronically.
✔ Interac e-Transfers – Enables quick money transfers to friends and family.

Many banks offer different types of chequing accounts, some with unlimited transactions, while others have monthly limits to avoid extra fees.

How Banks Make Money from Chequing Accounts

Even though chequing accounts do not earn interest, banks still profit from them in several ways:

1. 1. Monthly Fees – Many banks charge $5 to $30 per month for maintaining a chequing account. Some accounts offer fee waivers if a customer maintains a minimum balance (e.g., $3,000).

   2. Overdraft Fees – If a person spends more money than they have, the bank may allow the transaction to go through but charge an overdraft fee (typically $45 or more). Interest is also charged on the negative balance.

   3. ATM Fees – Banks charge customers for using ATMs outside their network. Fees can range from $2 to $5 per transaction, plus additional fees if using an ATM abroad.

   4. Interac e-Transfer Fees – Some chequing accounts limit the number of free e-Transfers per month and charge $1.50 or more for additional transfers.

   5. "Inactive Account" Fees – If a chequing account is not used for a long period, some banks charge a dormant account fee.

Comparing Chequing Accounts to a Subscription Service

A chequing account is similar to a streaming service like Netflix or Spotify—people pay a monthly fee to access its features. However, unlike a streaming service, a chequing account can have extra hidden fees that add up over time.

For example:

• • If someone pays $15 per month for their chequing account, they are spending $180 per year just to have access to their money.

  • If they pay overdraft fees twice a year ($45 x 2 = $90), that total jumps to $270 per year in banking costs.

  • Using an ATM from another bank a few times per month can add another $60 or more per year.

By choosing the right account and avoiding unnecessary fees, customers can save hundreds of dollars per year on banking costs.

Tips to Avoid Extra Fees

✅ Look for no-fee accounts – Some online banks and credit unions offer chequing accounts with no monthly fees.
✅ Meet the minimum balance requirement – Some banks waive fees if a certain amount (e.g., $3,000) is always in the account.
✅ Use your own bank’s ATMs – Avoid ATM withdrawal fees by using machines from your own bank.
✅ Track your balance to avoid overdraft fees – Setting up mobile alerts can help prevent accidental overspending.
✅ Choose a student or youth account if eligible – Many banks offer free chequing accounts for students and young adults.

Why Understanding Chequing Accounts is Important

A chequing account is one of the most commonly used financial products, but it can also be one of the most expensive if not managed properly. By understanding how banks charge fees and how to minimize costs, customers can use their chequing accounts effectively without losing money on unnecessary charges.

Section 4: Savings Accounts – A Product for the Future

What is a Savings Account?

A savings account is a financial product designed to help people store money safely while earning interest over time. Unlike a chequing account, which is meant for daily transactions, a savings account is used for long-term savings goals, such as:

✔ Emergency funds – Money set aside for unexpected expenses (e.g., car repairs, medical bills).
✔ Big purchases – Saving for a new phone, a vacation, or a car.
✔ Education and future planning – Setting money aside for post-secondary education or retirement.

Since banks want customers to keep money in savings accounts instead of withdrawing it frequently, these accounts often limit the number of withdrawals per month and offer a higher interest rate than chequing accounts.

How Do Savings Accounts Work?

✔ Earn Interest – Banks pay interest to customers based on the balance in their savings account. Interest is typically calculated daily and paid monthly.
✔ Limited Transactions – Many savings accounts only allow a few free withdrawals per month (e.g., 6 free withdrawals). Exceeding this limit results in extra fees (e.g., $5 per extra withdrawal).
✔ Easy Access to Funds – While savings accounts are meant for storing money, customers can still transfer funds to a chequing account for spending when needed.

How Banks Make Money from Savings Accounts

Even though banks pay interest on savings accounts, they still profit from them in several ways:

1. Using Deposits to Lend Money

• • When customers deposit money into a savings account, the bank does not just store it—instead, it lends that money to other customers in the form of loans, mortgages, and credit lines.

  • Banks charge higher interest rates on loans (e.g., 5-20%) than they pay on savings accounts (e.g., 1-2%), making a profit from the difference.

2. Paying Low Interest Rates

• • Many savings accounts offer very low interest rates, especially compared to inflation.

  • Some banks offer "promotional rates" (e.g., 4% interest for the first 3 months), but after that, the rate drops significantly.

3. Charging Fees for Withdrawals

• • Most savings accounts limit free withdrawals (e.g., 6 per month). If a customer withdraws money too often, they pay a fee (e.g., $5 per extra withdrawal).

  • Some banks also charge transfer fees when moving money to another bank.

Types of Savings Accounts

Banks and credit unions offer different types of savings accounts, depending on the customer’s needs:

1. Basic Savings Account

✔ Offers low interest (usually under 1%).
✔ Limited free withdrawals per month.
✔ Ideal for short-term savings.

2. High-Interest Savings Account (HISA)

✔ Higher interest than a basic savings account (e.g., 2-4%).
✔ Some accounts require a minimum balance to earn interest.
✔ Best for long-term savings goals.

3. Tax-Free Savings Account (TFSA)

✔ Allows Canadians to save and invest money without paying taxes on interest or investment gains.
✔ TFSA funds can be withdrawn at any time without penalties.
✔ Contribution limits apply (e.g., $7,000 per year in 2024).

Comparing Savings Accounts to a Piggy Bank

A savings account is like a piggy bank—but with interest. The longer money stays in the account, the more it grows. However, unlike a piggy bank, banks use deposited money to make loans, and they often charge customers if they withdraw money too often.

For example:

• If someone deposits $1,000 into a savings account with a 1% interest rate, they will earn $10 per year.

• If they withdraw money too many times, they might pay more in fees than they earn in interest.

That’s why choosing the right savings account and understanding how it works is important.

Tips to Make the Most of a Savings Account

✅ Compare interest rates – Some banks offer better rates than others. Online banks often have higher interest rates than traditional banks.
✅ Avoid excessive withdrawals – Stick to the free withdrawal limit to avoid fees.
✅ Set up automatic transfers – Transferring money from a chequing account to savings each month helps build savings over time.
✅ Use a TFSA for tax-free savings – If eligible, a Tax-Free Savings Account (TFSA) can help grow savings without paying taxes on interest.
✅ Be cautious of "promotional rates" – Some banks advertise high interest rates for a short time but lower them after a few months.

Why Understanding Savings Accounts is Important

A savings account helps people build financial security, but banks still make money from them. By understanding how interest rates, fees, and withdrawal limits work, customers can maximize their savings while avoiding unnecessary costs.

Section 5: Loans and Mortgages – Borrowing Money from the Bank

What is a Loan?

A loan is a financial product that allows people to borrow money from a bank with the agreement that they will pay it back over time with interest. Loans help people afford large purchases, such as cars, tuition, or home renovations, without needing to pay everything upfront.

Since banks are businesses, they do not lend money for free—they charge interest on loans, which is how they make a profit. The higher the interest rate and the longer the repayment period, the more money the bank earns from the loan.

Types of Loans

1. Personal Loans

✔ Used for large purchases, home repairs, or emergencies.
✔ Can be secured (backed by an asset like a car) or unsecured (no collateral required).
✔ Interest rates typically range from 6% to 20%, depending on the customer’s credit history.

➡ How banks make money:

• Charging interest on the loan balance.

• Adding fees for loan applications, late payments, or early repayment.

2. Car Loans (Auto Loans)

✔ Used to purchase a vehicle.
✔ The car itself is collateral—if the borrower does not repay, the bank can take the car back.
✔ Interest rates typically range from 5% to 10%.

➡ How banks make money:

• • Charging interest on the loan.

  • Offering dealer financing with higher interest rates to increase profit.

3. Student Loans

✔ Used to pay for tuition, books, and living expenses while attending college or university.
✔ In Canada, student loans can come from the government (e.g., Canada Student Loans) or banks (private student loans).
✔ Some student loans do not require repayment until after graduation.

➡ How banks make money:

• • Charging interest once the repayment period begins.

  • Offering lines of credit to students with higher interest rates.

What is a Mortgage?

A mortgage is a special type of loan used to buy a house or property. Because houses are expensive, most people cannot afford to pay the full price upfront, so they borrow money from a bank and repay it over many years.

✔ Mortgages typically last 15 to 30 years.
✔ Interest rates are lower than other loans (usually between 3% and 7%).
✔ The house itself is collateral—if the borrower cannot pay, the bank can take ownership of the home (foreclosure).

➡ How banks make money from mortgages:

• • Charging interest over many years (even a small interest rate generates huge profits over decades).

  • Offering different mortgage terms—longer terms often mean more money paid in interest.

  • Penalty fees if a borrower pays off the mortgage early.

How Banks Make Money from Loans and Mortgages

Banks profit from lending money in several ways:

✔ Interest charges – The longer a loan is outstanding, the more interest the borrower pays.
✔ Origination fees – Some banks charge a one-time fee for processing a loan.
✔ Late payment fees – If a borrower misses a payment, banks charge penalties.
✔ Early repayment penalties – Some banks charge fees if a borrower pays off a loan early (because it reduces how much interest the bank earns).

The Cost of Borrowing: Understanding Interest Rates

Interest rates determine how much extra money a borrower will pay the bank over time. There are two main types of interest rates:

1. Fixed Interest Rate

✔ Does not change over the life of the loan.
✔ Easier for budgeting because monthly payments stay the same.
✔ Common for mortgages and car loans.

2. Variable Interest Rate

✔ Can increase or decrease based on market conditions.
✔ Monthly payments may go up, making it less predictable.
✔ Can be risky, especially for long-term loans.

➡ Example:
If someone borrows $10,000 at a 10% fixed interest rate for 5 years, they will pay $1,000 in interest per year, or $5,000 in total interest over the life of the loan.

However, if they miss payments, late fees and extra interest charges can make the loan even more expensive.

Comparing Loans to "Renting Money"

A loan is like renting money from the bank—just as someone pays rent to live in an apartment, borrowers pay interest to "use" the bank's money. The longer they rent (borrow), the more they pay.

For example:

• • If a person borrows $20,000 for a car at 5% interest for 5 years, they will pay about $2,645 in interest over the loan’s life.

  • If they borrow the same amount at 10% interest, they will pay over $5,500 in interest—more than double!

This is why choosing a loan with a lower interest rate is important for saving money.

Tips to Borrow Money Wisely

✅ Compare loan options – Different banks offer different interest rates.
✅ Make extra payments – Paying more than the minimum reduces interest costs.
✅ Improve credit score – A higher credit score means lower interest rates.
✅ Avoid unnecessary loans – Borrow only what is needed, not extra.
✅ Be cautious with long-term loans – A longer repayment period means paying more interest over time.

Why Understanding Loans and Mortgages is Important

Borrowing money can be helpful or harmful, depending on how loans are managed. A well-planned loan can help people buy homes, cars, and education, but mismanaging debt can lead to financial struggles.

By understanding how interest, fees, and repayment work, people can borrow wisely and avoid unnecessary debt.

Section 6: Credit Cards – A Borrowing Tool

What is a Credit Card?

A credit card is a financial product that allows people to borrow money from the bank to make purchases. Unlike a debit card, which takes money directly from a person’s chequing account, a credit card uses borrowed funds that must be repaid later.

Credit cards are convenient because they allow people to:
✔ Buy items even if they don’t have the money immediately.
✔ Make secure payments online and in stores.
✔ Build a credit history, which helps when applying for loans or mortgages.

However, credit cards can also lead to serious debt problems if not used wisely.

How Credit Cards Work

1. 1. Credit Limit – Each credit card has a spending limit (e.g., $1,000 to $10,000). This is the maximum amount a person can borrow at one time.

   2. Billing Cycle – Each month, the bank sends a credit card statement listing all transactions and the total amount owed.

   3. Minimum Payment – Banks allow customers to pay a small percentage (e.g., 3%) of their balance instead of the full amount. However, unpaid balances accumulate interest.

   4. Interest Charges – If the full balance is not paid by the due date, the remaining amount starts collecting interest at a very high rate (often 20% or more).

Why Credit Cards Cause the Most Debt Problems

Credit cards are one of the biggest sources of personal debt in Canada. Many people struggle to pay off their balances, leading to high-interest debt that can spiral out of control.

1. Minimum Payments Keep People in Debt

Many people only pay the minimum payment each month, thinking they are keeping up. However, banks charge high interest on the remaining balance.

➡ Example:
If someone owes $2,000 on a credit card with a 20% interest rate and only makes the minimum payment (3%) each month, it will take over 10 years to pay off the balance—and they will pay more than $2,500 in interest alone!

2. Easy to Spend, Hard to Repay

Unlike a loan, which has set payments, a credit card lets people continue borrowing while they still owe money. This makes it easy to:
✔ Buy things without thinking about repayment.
✔ Accumulate debt quickly without realizing how much is owed.

3. High Interest Rates Make Debt Grow Fast

Most loans have interest rates of 5% to 10%, but credit cards often charge 20% or more. If someone carries a balance, they end up paying much more than what they originally borrowed.

➡ Example:
If a person buys a $1,000 TV with a credit card and only makes minimum payments, they could end up paying over $1,500 for the TV due to interest charges.

How Banks Make Money from Credit Cards

Banks earn huge profits from credit cards in several ways:

✔ Interest Charges – If customers do not pay the full balance, banks charge high interest.
✔ Annual Fees – Some credit cards charge $50 to $500 per year just to use them.
✔ Transaction Fees – Businesses pay a small fee (1-3%) to the bank every time a customer uses a credit card.
✔ Late Payment Fees – If a customer misses a payment, banks charge a penalty fee (often $30 to $50).

Types of Credit Cards

1. Standard Credit Cards

✔ Have a spending limit based on credit history.
✔ Charge high interest rates (15-25%) on unpaid balances.
✔ No major rewards or benefits.

2. Rewards Credit Cards

✔ Offer cashback, travel points, or store rewards for every dollar spent.
✔ Often come with an annual fee (e.g., $99 per year).
✔ Only worth using if the full balance is paid each month.

3. Low-Interest Credit Cards

✔ Have lower interest rates (8-12%) but fewer rewards.
✔ Good for people who sometimes carry a balance.

4. Secured Credit Cards

✔ Require a deposit (e.g., $500) to secure the credit limit.
✔ Used by people building or repairing credit.

How to Avoid Credit Card Debt

✅ Pay the full balance every month – This avoids interest charges.
✅ Set a spending limit – Only use the card for planned purchases.
✅ Choose a low-interest card – If carrying a balance is unavoidable.
✅ Avoid cash advances – Banks charge higher interest (often 25% or more) on cash withdrawals.
✅ Monitor statements – Check transactions regularly to avoid overspending.

Why Understanding Credit Cards is Important

Credit cards are one of the most common financial tools, but they are also one of the easiest ways to get into debt. By understanding how interest, fees, and payments work, people can use credit cards responsibly and avoid financial trouble.

Section 7: Banks as Businesses – Why Does It Matter?

Banks Are Businesses, Not Just Services

Many people think of banks as safe places to store money, but banks are businesses that aim to make a profit—just like Apple sells iPhones or Nike sells shoes. Instead of selling physical goods, banks sell financial products like chequing accounts, loans, mortgages, and credit cards.

Because banks want to maximize their profits, they design their financial products in ways that earn them money—often through fees, interest, and investments. Understanding how banks operate helps customers make better financial choices and avoid paying unnecessary costs.

How Do Banks Make Money?

Banks earn billions of dollars each year in Canada. The largest Canadian banks collectively made over $50 billion in profit in recent years. They make money through three main methods:

1. Interest Income – Lending Money at a Higher Rate

✔ Banks lend out money in the form of loans, mortgages, and credit cards.
✔ Borrowers must repay the loan with extra money (interest).
✔ Banks charge a higher interest rate on loans than they pay on savings accounts, keeping the difference as profit.

➡ Example: If a bank pays 2% interest on savings accounts but charges 5% on mortgages, it earns 3% profit on the money it lends.

2. Fees – Charging for Services

✔ Many banking services come with monthly or transaction fees.
✔ Customers often pay fees without realizing it.

➡ Examples of Common Bank Fees:

• 1. Chequing account fees – $5 to $30 per month.

  2. Overdraft fees – $45 or more per transaction.

  3. ATM withdrawal fees – $2 to $5 per use (higher for non-bank ATMs).

  4. Credit card annual fees – $50 to $500 per year.

Banks often make more money from fees than from interest, especially with credit cards and chequing accounts.

3. Investments – Using Customer Deposits to Make Money

✔ When customers deposit money into chequing and savings accounts, banks do not just hold it—they invest it in stocks, bonds, and other assets to earn returns.
✔ The bank keeps the profit while paying low interest rates to customers.

➡ Example: If a bank invests $1 million from customer deposits and earns a 7% return, but only pays customers 1% interest on savings, the bank keeps the 6% difference as profit.

Why Does This Matter to Customers?

Because banks are designed to make money, they encourage customers to use financial products in ways that generate profit. Understanding this helps people:

✅ Avoid unnecessary fees by choosing the right financial products.
✅ Compare interest rates to get the best deal on loans and savings.
✅ Use credit wisely to prevent costly debt.
✅ Recognize sales tactics when banks promote financial products.

➡ Example: If a bank offers a credit card with a "0% interest introductory period," they are hoping customers carry a balance after the promo ends so they can charge 20% interest later.

By thinking of banks as businesses that sell financial products, customers can treat financial decisions like shopping for a phone or a car—comparing options, avoiding hidden fees, and choosing the best deal.

Final Thought: Be a Smart Banking Customer

Banks exist to help people manage money, but their main goal is profit. Customers who understand how banks make money can use financial products wisely, avoid unnecessary costs, and stay in control of their finances.

Section 8: Key Vocabulary

Understanding financial terms helps people make smart banking decisions and avoid unnecessary costs. Here are some important words and their meanings:

General Banking Terms

✔ Financial Product – A service offered by a bank, such as chequing accounts, savings accounts, loans, credit cards, and mortgages.

✔ Interest – The extra money a bank charges on loans or pays on savings accounts.

✔ Transaction – Any movement of money, such as deposits, withdrawals, purchases, or transfers.

✔ Overdraft – Spending more money than what is available in a chequing account, often leading to fees.

✔ Service Fee – A charge for using a bank’s financial product (e.g., monthly account fees).

Accounts and Cards

✔ Chequing Account – A bank account used for everyday spending and transactions.

✔ Savings Account – A bank account designed for storing money and earning interest.

✔ Debit Card – A card linked to a chequing or savings account that allows purchases and withdrawals directly from the available balance.

✔ Credit Card – A card that lets people borrow money from the bank to make purchases, with the requirement to repay it later (often with interest).

✔ Minimum Payment – The smallest amount a person can pay on their credit card bill to avoid late fees, but interest is still charged on the remaining balance.

✔ Credit Limit – The maximum amount a person can borrow using a credit card.

✔ Cash Advance – Withdrawing cash from a credit card, usually with very high interest rates and additional fees.

Loans and Mortgages

✔ Loan – Money borrowed from a bank that must be repaid with interest over time.

✔ Mortgage – A special type of loan used to buy a house, with the property itself acting as collateral.

✔ Fixed Interest Rate – An interest rate that stays the same for the entire loan term.

✔ Variable Interest Rate – An interest rate that can go up or down depending on market conditions.

✔ Late Payment Fee – A penalty charged if a borrower misses a loan or credit card payment.

✔ Early Repayment Penalty – A fee charged if a loan or mortgage is paid off before the agreed time.

How Banks Make Money

✔ Profit – The money a bank earns after covering expenses, mostly from interest, fees, and investments.

✔ Investment – Banks use customer deposits to buy stocks, bonds, and other financial assets to earn profits.

✔ Promotional Rate – A temporary low interest rate offered to attract customers, often followed by a much higher rate.

✔ Bank Fees – The extra charges banks apply for various services, such as ATM withdrawals, overdrafts, or account maintenance.

✔ Financial Literacy – Understanding money, banking, and financial products to make informed financial decisions.

Why Vocabulary Matters

Knowing these words helps customers understand financial products, avoid hidden costs, and make smarter banking decisions. Financial literacy is the key to staying in control of personal finances and avoiding unnecessary debt.