How Do Banks Work?


Quick Answer

Banks essentially operate as storage and exchange systems for cash and financial assets: people and corporations place money in banks, which is then circulated among customers to help people pay for various items. When people make deposits into banks, the money doesn't simply sit idly, say experts at the Federal Deposit Insurance Corporation, or FDIC. Instead, banks lend and loan that money out to others in the banking system in need of financing.

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Full Answer

The banking system begins with the actions of bank customers, who deposit money into accounts. Upon making a bank deposit, people authorize their banks to use their money for other expenses. In exchange for that freedom of use, banks pay users a small fee, typically on a monthly basis, called interest. Interest proves a valuable and vital asset to banks, as they could not operate without money from users' accounts. Therefore, they pay interest for each dollar a person invests into an account, say officials at the United States Mint.

Banks do not gain money from maintaining accounts or paying out interests. Instead, they earn revenues by taking money from one account then lending it to another individual or entity, called a borrower. Banks charge a fee on top of the money requested by these entities, creating a profit. Essentially, the banking system creates a win-win situation for banks and bank customers, who earn a small profit from holding bank accounts and enjoy safe money management.

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