BANKS AND BANKING JOBS

What Is a Bank?

A bank is a financial institution that is licensed to accept checking and savings deposits and make loans. Banks also provide related services such as individual retirement accounts (IRAs), certificates of deposit (CDs), currency exchange, and safe deposit boxes.

There are several types of banks including retail banks, commercial or corporate banks, and investment banks.

In the U.S., banks are regulated by the national government and by the individual states.

KEY TAKEAWAYS

A bank is a financial institution licensed to receive deposits and make loans.
There are several types of banks including retail, commercial, and investment banks.
In most countries, banks are regulated by the national government or central bank.

Understanding Banks

Banks have existed since at least the 14th century. They provide a safe place for consumers and business owners to stow their cash and a source of loans for personal purchases and business ventures. In turn, the banks use the cash that is deposited to make loans and collect interest on them.

The basic business plan hasn't changed much since the Medici family started dabbling in banking during the Renaissance, but the range of products that banks offer has grown.

Basic Bank Services

Banks offer various ways to stash your cash and various ways to borrow money.

Checking Accounts

Checking accounts are deposits used by consumers and businesses to pay their bills and make cash withdrawals. They pay little or no interest and typically come with monthly fees, usage fees, or both.

Today's consumers generally have their paychecks and any other regular payments automatically deposited in one of these accounts.

Savings Accounts

Savings accounts pay interest to the depositor. Depending on how long account holders hope to keep their money in the bank, they can open a regular savings account that pays a little interest or a certificate of deposit (CD) that pays a little more interest. The CDs can earn interest for as little as a few months or as long as five years or more.

It is important to note that the money in checking accounts, savings accounts, and CDs is insured up to a maximum of $250,000 by the federal government through the Federal Deposit Insurance Corp. (FDIC).1

Loan Services

Banks make loans to consumers and businesses. The cash that is deposited by their customers is lent out to other customers at a higher rate of interest than the depositor is paid.

At the highest level, this is the process that keeps the economy humming. People deposit their money in banks; the bank lends the money out in car loans, credit cards, mortgages, and business loans. The loan recipients spend the money they borrow, the bank earns interest on the loans, and the process keeps money moving through the system.

Just like any other business, the goal of a bank is to earn a profit for its owners. For most banks, the owners are their shareholders. Banks do this by charging more interest on the loans and other debt they issue to borrowers than they pay to people who use their savings vehicles.

For example, a bank may pay 1% interest on savings accounts and charge 6% interest for its mortgage loans, earning a gross profit of 5% for its owners.

Banks make a profit by charging more interest for loans than they pay on savings accounts.

Brick-and-Mortar and Online Banks

Banks range in size from small, community-based institutions to global commercial banks.

According to the FDIC, there were just over 4,200 FDIC-insured commercial banks in the United States as of 2021.2 This number includes national banks, state-chartered banks, commercial banks, and other financial institutions.

Traditional banks now offer both brick-and-mortar branch locations and online services. Online-only banks began emerging in early 2010s.

Consumers choose a bank based on its interest rates, the fees it charges, and the convenience of its locations, among other factors.

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