It just seems like a semi necessary thing to have to use a bank, why do they pay me a % to keep money there?
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Competition. Banks need a large amount of customer deposits so they can have an inexpensive source of funds to loan out to others.
If one bank offers an account with no interest, but another one does pay interest, customers may be influenced to use the latter.
Because banks don’t just hold your money *for free,* they are businesses that seek to earn money for their existence. They take your money and they lend it to other people through mortgages and loans and they earn interest on that money and that’s their profit.
Now the there laws in place that say things like for every $1 a bank lends in a mortgage it needs to keep $2 in “the vault”, in other worlds there is a limit on how many loans a bank can make, which limits how money it can earn, which is all based on how much money it holds in it’s “vault” (banks don’t really keep much physical money any more the vault is more like a spread sheet at this point).
So the interest rates banks offer are the way of attracting you and your money to deposit there so they can take your deposit and give it to someone else for profit.
In general the more money that’s deposited the less the banks need to attract new people which is why, for example, in the summer of 2020 banks weren’t super eager to offer high interest rates to get people’s money – pretty much every was stuck at home saving their pay checks and savings account balances went sky high for a little bit.
I switched from my local credit union and their paltry .10% interest. Without going into detail, my wife and i have banked there for years with our life savings and have received pennies essentially. We got maybe $100 a year in dividends. They say the dividends are low because they have to maintain their branches, etc.
We are not the types to need a human to bank, so we switched to the online banking format and went with SoFi. We are now getting 4.5% on our savings and have made more in interest payments to us in a few months than we did many years at the credit union. We now see over $100 a month in dividends. The tradeoff to this is no locations to go to and a fee for depositing cash at a retailer, which is fine because we are cashless type couple. Less overhead for them should be more dividends to the customer.
Now as far as paying you. Thats how they keep your money coming in. It seems redundant for them to pay you, but there is a weird amount of people who don’t realize the banks take your money and invest it for themselves and are essentially in debt to you. I have come across many people, including my wifes grandma, who thinks the cash you deposit just sits in their vault waiting for you. When you make deposits in any way (cash, payroll, etc) you are loaning the bank money. They owe you at least what you have deposited. That money is gone before it touches their hands. … to keep your money rolling in, they need to give you an incentive to stay (dividends). You being a customer is how they make money. If they cannot give you an incentive, then they can lose your income to another institution (the competition)
The banks are loaning that money out at a much higher rate than what they are giving you. Win win.
Your money isn’t put into a vault but used actively (for investments, to lend to their other clients, &c.) to generate profit.
So it’s a tool *you* lend them and they pay you rent for its use.
Of course, depending on the financial situation, the rent (interest) can sometimes get negative: then in fact you pay for keeping your money safe at the bank.
they want you to keep your money with them, so they can invest it in stuff that will hopefully make them more money, interest is basically their payment to you for letting them use your funds, instead of having to borrow them fom another bank
U lend me $20 I give ya a dollar extra later. Good deal ;).
I’ll also lend Bobby $20 but charge him two extra dollars later. Bobby also takes the deal.
Now i (the bank) have $1 out of virtually thin air, and everybody else is OK with our deal
They pay you money to keep you money there because they can use those reserves of cash to make loans where they charge higher rates of interest. They pay you 2% on a savings account, and they charge 7% interest on a mortgage or car loan, 25% on a credit card balance. That spread is their primary revenue source. Banks have reserve requirements, meaning they can only lend more if their deposits go up.
Ever notice that the costs of borrowing money (credit card interest rates, mortgage rates, loan rates) are always higher than the interest the bank is willing to give you on your savings account?
Banks borrow money from you, invest some, loan some to others at higher rates, and pocket the difference. Your money provides them with the funds to do those things, so you get a piece of the action.
Banks get money to lend from deposits, but also from the fed. The amount they’re allowed to borrow is based on the amount of deposits they have. They then lend that money out at a significantly higher rate than they pay you.
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