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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Banks offer loans on the money.
So if a bank offers you 5% on your $100 stored there, you earn $5 in a year.
If the bank can loan the money to someone else at 7%, they get $7, give you the $5, and have $2 profit.
Putting money in a bank is a form of lending your money. Banks use their accounts as cash reserves to lend out. They pay you interest for borrowing your money.
When you give a back money they can use it to make more money through loans and other confusing methods. The more money that people give the bank the more money the bank can make from it. So they want to encourage people to deposit and keep money in their accounts
Because they are using it for personal enrichment, they take your money and invest it for profit and give you a small cut.
in a simple term, because they use your money to make money, for example by lending it other people and charge an APR on that loan.
They make money by lending your money to others. That’s your cut of the interest they collect from those loans. It’s the incentive for people to give them money which they can then loan out at a profit.
When you give your money to a bank, they use that money to give out loans. They pay back a small amount of their profits from the loans to you, the person whose money they are lending out. The interest payments are an incentive to use their bank over others and a way of paying you back.
Let’s say you have $1000 in your pocket. You can purchase anything up to $1000 without issue. But, once you loan it to someone else, including a bank, you can no longer use it to purchase goods. The interest is to pay for the inconvenience of no longer being able to use your own money. It is sometimes called a convenience fee. Historically, the real interest rate has been between 2 and 3 percent. Other factors that go into an interest rate are inflation, long term risk, and the risk that you won’t be repaid.
Many people here try to give ELI5 responses using fractional reserve banking, but this must be corrected. The Fed dropped the fractional reserve requirement to zero per cent in 2020. Many countries have no reserve requirement.
When someone deposits to a Bank, this changes the Bank’s balance sheet. A balance sheet is a record of assets the bank has and liabilities. Assets are what the bank owns and liabilities are what it owes.
When a person makes a deposit, there is no net change in the Bank’s balance sheet. The Bank has a new asset, cash reserves, but it also creates an equivalent liability – a deposit – because it owes this money to a depositor.
The bank then exchanges the cash reserves for an asset that earns interest (e.g. a loan to the government, a business or an individual).
Earnings from exchanging the cash reserves for something that earns interest are shared with the depositor as a regular interest payment.
So, why don’t banks make infinite money when the fractional reserve rate is zero?
Risk. Cash reserves have no risk. However, if the bank reinvests the cash reserves in a loan, there is a chance that the loan will not be repaid, so the bank won’t be able to pay the depositor. Riskier investments offer higher payouts but a greater risk of default (non-payment). For example, a loan to a government is much les risky than a loan to a business, so the business must pay more interest.
There are many complex international laws and rules about how banks manage these risks called the Basel regulatory framework. FDIC insurance in the U.S. protects depositors up to a certain amount if the bank cannot repay depositors because too many of its investments have lost value or stopped paying.
They give you .5% interest so they have money to lend out at 15% interest. If they didn’t have your money, they couldn’t be in business.
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