How Banking Works
Banks offer a large number of financial services, and pay you
interest on at least some of them. Because of this, many people
are quick to overlook the fact that banking is still a business,
and banks need to make money to pay their employees, keep the
utilities running, and make a profit for their shareholders and
customers. If you've ever found yourself wondering exactly how
it is that banks manage to pay out as much as they do while
still making money, then this article is designed for you.
Below you'll find information on some basic banking services, as
well as how banks make the money that they need to cover all of
their expenses and make the profits that they need to grow.
The Basics of Banking
Most banks have a variety of account types and services in
common. These include savings accounts, chequeing accounts,
certificates of deposit, investment services, online account
access, and lending services, and are among the things that most
people expect to find when they choose a new bank.
Having services in common with other banks enable the banking
industry to be competitive... one bank can set itself apart from
the rest by offering superior service and better rates and terms
than the others that they compete with locally.
Savings, CD's, and Other Interest-Bearing Accounts Some of the
services that banks offer are interest-bearing, meaning that
they have an interest rate that is paid to the account holder
based upon the amount of money that's in the account. These
accounts are an incentive for customers to put both their money
and their trust into the bank, as they are the accounts that pay
a return on the money in them. Interest rates that are paid on
these accounts can vary from bank to bank, though they are all
based upon rates that are set nationally to ensure that they do
not fall too low.
Chequeing, Loans, and Other Interest-Charging Accounts
In order for banks to stay in business, they have to make money
one way or another. They do this by issuing loans, offering
chequeing accounts, and having other interest-charging accounts
and services that must be paid for. Loans require that the
borrowed amount be repaid with interest, and many chequeing
accounts either charge a monthly maintenance fee or have other
costs associated with them in addition to the overdraft fees and
fines that are applied when you try to write a cheques for more
than you have in your account.
Other services, such as safe deposit boxes, also have fees
associated with their use, and credit cards that are issued by
banks charge interest rates as well as potentially some other
fees associated with their use.
Advanced Banking Services
There are a variety of banking services that are not common to
every bank but are well-known enough that many banks offer them.
Services such as online account access and itemized bank
statements may be offered for free or may have charges
associated with them, but provide a better understanding of your
finances and more information on where your money is going and
how than the standard bank statement. Banks may also offer
advanced services such as investment services, money market
accounts, currency exchange, and even the opportunity to invest
in the bank itself.
The services that are offered by any one bank will largely
depend upon that bank and the wishes of the owners and
operators, so you should investigate fully the services that are
offered before assuming that any one specific service is
available.
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