How Does a Bank Work, Anyway?

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Banking is such an essential part of our society that it’s difficult to imagine life without it. 

Banks provide a wide range of vital services in everyday life, from mortgage or car loans to savings accounts. But, what, exactly, do banks do? This guide will look at the role of banking in our society, how it works, and why we need it.

What is a bank, and what do they do?

A bank is a financial institution that assists in the safekeeping of your money

Like other financial institutions (such as credit unions or brokerage firms), banks exist primarily to store and provide access to your funds. 

Checking accounts are used for day-to-day spending, savings accounts are used for long-term savings, retirement accounts are used for future planning, and certificates of deposit (CDs) are used for investment purposes. Banks accomplish this by storing your money in a secure location and making it available to you through various channels, such as ATMs or branches.

Banking’s Evolution

Banks have been in existence for hundreds of years. 

They are an important part of our society and economy, providing financial products that assist us in managing our personal finances, investing in the stock market, purchasing homes or cars, making large purchases such as vacation trips with friends, and much more. Depending on your goals and needs, you can select from a variety of banking services.

Throughout history, banks have served as a hub for community activities and served as a repository for savings and financial transactions. Many people know how bank tellers serve as trusted sources of information on local businesses or promote their own through novel methods such as providing catalogs with coupons redeemable at your favorite store. Banks also encourage civic participation in many communities by sponsoring events and donating to local charities.

Banking in America has a long history, but it has also changed over time to adapt to technology and consumer behavior changes. 

In fact, there are more banking options now than ever before. Banks have developed digital channels through which customers can access their accounts and conduct transactions. This is beneficial to the consumer, who can now select how they want to interact with their bank’s services.

How banks work with the government

Banking is a tightly regulated industry.

Banks must follow strict laws and regulations in order for the economy to function properly, as they are part of an intricate network that provides funding to businesses and consumers alike.

Governments enact legislation that banks must abide by, both internally within their own bank’s policies and procedures and externally by adhering to the rules and regulations enacted by government agencies.

The United States Congress enacts legislation that affects all industries, including banking. The Federal Reserve Board (FRB) is the federal agency in charge. It regulates how banks operate in terms of their services, fees they can charge customers for certain transactions or overdrafts, capital levels they must keep on hand, and more.

Banking is about much more than just money––it’s also about risk management, which can affect other parts of the economy or the financial system as a whole if one bank fails. 

If you have a large number of bad loans outstanding, your ability to make new ones may be hampered because no one wants to do business with you. When this occurs, it can have repercussions throughout the economy, leading to the failure of other banks or businesses that rely on them for funding.

Banks act as a conduit between individuals and corporations, assisting them in saving money or borrowing funds to invest in their businesses. Banks also help the government manage its financial transactions, such as processing tax returns and payroll payments for businesses.

How do banks make money?

Banks make money by charging customers fees. In fact, banks generate various revenue streams, ranging from overdraft fees and monthly account maintenance fees to ATM withdrawal fees. 

Banks can also generate additional revenue by investing customer checking accounts in interest-bearing investment products such as certificates of deposit (CDs) or savings accounts that pay out dividends. Some banks even offer their own investment options.

Banks do not simply accept money and lend it out. Other services, such as checking accounts and loans, are also subject to fees. You pay the bank to keep your money safe while they invest it on your behalf if you have a certificate of deposit (CD).

The Importance Of A Bank Audit

Types of Banks

There are many different types of institutions that offer banking services, including credit unions and savings associations. 

Banks can be divided into five categories: retail banks (or consumer-focused), wholesale or corporate banks, community development banks, investment banks, and online/neobanks.

Retail Banks

Retail banks offer personal financial products to the people they serve, whereas wholesale/corporate banks help businesses borrow money and manage their cash flow.

These organizations assist you in managing your finances and offer a wide range of products such as checking accounts, savings accounts, certificates of deposit (CDs), mortgages, credit cards, and more. 

Customers can seek advice from tellers or bank representatives on managing their money and saving for the future with tools such as retirement plans.

Credit Unions

These types of banks are owned and operated by their members instead of shareholders, so they don’t exist to make a profit for investors. 

On the other hand, credit unions strive to provide the best financial products and services at low rates so that their customers can save money or borrow money on reasonable terms. Membership is typically restricted––for example, employees of a specific company, or residents of a certain town, may be eligible to join.

Wholesale Banks

Wholesale banks work with corporations on large deals to offer loans for commercial real estate purchases, construction projects, and equipment leasing agreements. 

These types of banking services may not be available at a retail bank branch because it isn’t part of their customer base.

These organizations exist to assist businesses in borrowing money or managing their cash flow; unlike retail banks, they do not provide personal financial services. They typically work with large corporations and provide loans for commercial real estate purchases, construction projects, and equipment leasing agreements.

Investment Banks 

These banks assist businesses and governments in raising capital for purposes such as mergers, acquisitions, and initial public offerings (IPOs). In some cases, investment banking units work with the same company over time as their financing requirements grow.

To that end, these organizations typically offer services such as equity research reports on specific stocks or other securities. They also assist in managing mergers and acquisitions and advise companies on what types of stocks or bonds to issue.

Community Development Banks

Community development banks are frequently local organizations that provide loans and other financial services to underserved communities. These banks aim to provide loans and other financial services in underserved areas. 

They also offer training programs for small business owners, affordable housing assistance, and funds for community development projects such as purchasing a building for a new grocery store.

Online/Neobanks

These are digital-only or mobile-first financial institutions that help customers manage their finances more efficiently. They may offer fewer products than traditional retail banks. 

Still, they typically have lower fees and higher interest rates on savings accounts, which can be appealing to people who do not want the costs associated with checking accounts at traditional retail banks.

Generally, these types of banks are created to serve a need in the market and have an innovative business model. Many of these organizations are not new but rather rebranded traditional banks to cater to digitally savvy customers.

What types of products and services do banks offer?

Banks offer a wide range of services to their customers, which may include:

  • Savings Accounts 
  • Checking accounts (that allows day to day spending) 
  • Mortgages and car loans that help you buy homes or cars. 
  • Credit cards that allow you to purchase things now but pay for them later.
  • Investments that help you save for your retirement or children’s education.

They also provide various types of savings accounts, such as:

  • High yield checking accounts (allows higher interest rate than traditional bank checking) 
  • Interest earning money market/savings accounts (higher interest rates, but only allow limited transactions to prevent people from withdrawing money from this account too often)
  • Certificate of deposit accounts (allows you to lock your money into a specific term and receive a higher interest rate but with penalties for withdrawing early. Usually used for emergency funds or long-term savings.) 

Many people use banking services every day without really thinking about it, to: 

  • Deposit their paycheck into a checking account so they can spend money immediately; 
  • Take out a car loan at an interest rate lower than if they had used a credit card; 
  • Receive a line of credit for a major purchase that allows them to spend money now and pay for it in installments.

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Our team has been working hard on the next big thing––an easy way for you to help save our planet while earning rewards. Aspiration Zero is a credit card that rewards you for achieving carbon neutrality. You can sign up right now! Interested?

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