I never learned how it works
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Banks reward you with pennies for letting them use your cold, hard earned cash, to virtually create money out of thin air.
With fractional-reserve banking, they take your deposit and loan it to customer #2, who puts it in a bank account, whence it is loaned to customer #3, and so on.
The estimate is that with this system, banks create up to 10 times more money than there is to begin with.
This is why, when everyone asks to withdraw their account at the same time, the banks cannot meet the request. Ninety percent of that money only exist thanks to fractional reserve banking.
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The way banks make money at the retail level, and how they’re able to pay you for putting money into a savings account is through the net interest margin: when banks lend money to other people, they charge a higher interest rate such as 3% (the bank receives 3% from borrower). For people that put their money in a savings account, they give interest at a lower rate such as 1%. So, their net interest margin is 3% – 1% = 2%.
In short, they take a portion of money they gain from borrowers that they lend to, and give it to people that give the bank money via depositing into a savings account.
Originally (like, Roman times) You would pay a fee for banking services, which were highly valuable. When you give the bank your money they take over keeping it secure, and you have the ability to take money out in a completely different location without having to hire a person to physically move the money!
You can still buy this type of service, if you wish. It is basically how safety deposit boxes work. The items (such as cash) you give them are stored securely and you pay for that service.
However, modern banking generally works differently. Think of this from a Bank’s perspective. 10 people each deposit 100$. You are holding 1000$ in deposits. On any given day, 0-200$ of new money is deposited, and 0-200$ of deposited money is withdrawn.
Instead of keeping all 1000$ in cash in a hole in the ground, you can keep only 200$ to cover regular withdrawals, and invest the other 800$. Lets say you make 5% interest. You can then pass along that 4% return to your customers, keeping 1% for yourself for managing the entire situation!
This is what is done in pretty much all banking. Thus, the business works like this.
An illustrative example:
**HOLE IN THE GROUND:**
X$ Deposit
-1% – Cost of security
TOTAL : 1% from depositor to bank for services
**Invested Funds:**
X$ Deposit
-1% – Cost of Security
0.2X – Held as Cash for Withdrawals
0.8X Invested at 5% = +4% Return
25% Fee on Investment returns for managing investments: -1%
TOTAL: 2% from bank to depositor.
Of course, these numbers fluctuate. For modern times, banking can be paid for by the value the bank realizes just holding the money, with some left over to return to savers. Sometimes though, if investment returns are particularly low or if costs are particularly high, you will see banking services which have a net cost to depositors.
Banks generally pay you to save your money. However, many banks will charge fees if you don’t have enough money because the expense of managing an account isn’t worth the small amount of deposits.
Checking account: Daily use, almost never interest-earning (some do exist). Usually need to maintain a minimum balance or direct deposit for it to be free, otherwise usually around $10/mo.
Saving account: Not for daily use (has limits to how often you can withdraw). Usually interest earning (typically very minuscule and not worth mentioning, 0.01-0.05%; highest is around 3.5%). Has similar rules to not get charged maintenance fees.
Sometimes banks charge you a fee for having an account with them. I think its rare. But when you leave money with them they do pay you interest for having it sit there. So it can be both. Banks can make money from you with loans and stuff
Think of it this way. Banks aren’t just a place for you to store money.
They’re actually a money store. They “sell” money. They sell people money NOW for a bit more money LATER in the form of a loan.
But to do that, they need money NOW to loan to someone else.
That’s where you come in. You want somewhere to store your hard earned money that’s safe. The bank will let you and many others like you store their money there where they will then loan it out to others and they keep the interest on the loan. You get a laughable little amount of interest as thanks for storing your money there so they can loan it out to people.
The bank can do this because statistically it is unlikely you and everyone else in town will all come demanding their money at the same time that would collapse the bank.
When you think about a bank foreclosing on someone’s house or collateral and seizing the collateral….it makes you feel even better to realize the bank now owns the collateral…from someone else’s loan…that was lent by the bank…that was actually someone else’s money in the first place.
So banks basically borrow everyone’s money, lend it to someone else, then if you can’t pay, they get to keep it as if the principal was theirs to begin with
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