Banking 101: Everything You Need to Know About Banks and Their Services

What is a Bank?

A bank is a place where people and businesses can keep their money safely. It helps with things like saving, borrowing, and spending money. Think of a bank like a big, safe piggy bank that also lends money to others, helps you pay bills, and even gives advice on how to grow your money.

How Do Banks Work?

1. Deposits

• You deposit (put) your money in a bank account like savings or checking.

• For example, if you earn $100 from babysitting and save it in your bank, the bank might pay you a little extra (called interest) every month for keeping your money there.

• Banks then use this money to help others by giving loans.

2. Loans and Credit

• When someone needs extra money (like to buy a car or start a business), the bank lends them money called a loan.

• For example, if a person wants to buy a $10,000 car but only has $2,000, they can borrow $8,000 from the bank. They’ll pay this back slowly, with interest (extra money paid for borrowing).

• Banks make money because the interest they charge on loans is higher than what they pay on deposits.

3. Helping with Transactions

• Banks make spending and transferring money easy.

• Examples:

  • Use your debit card to buy groceries.

  • Pay your friend back for pizza using an app.

  • Send money to family abroad through wire transfers.

• Banks also offer checks, online banking, and tools to track your spending.

4. Other Services

• Investments: Banks use your money to invest in things like bonds or government projects to earn more money.

• Wealth Management: If you’re rich (or want to get there), banks can give advice on growing and managing your wealth.

• Currency Exchange: Need Euros for your vacation in Paris? Banks can exchange your dollars.

• Insurance: Some banks also help protect your home, car, or health through insurance.

5. Creating Money Through Lending

• Banks don’t keep all the money you deposit; they lend most of it out.

• For example, if 10 people deposit $1,000 each, the bank has $10,000. It keeps a small part, say $1,000, and lends out $9,000. This lending helps grow the economy because people use loans to buy houses, start businesses, and more.

6. Risk Management

• Before giving loans, banks check if someone can repay it.

• For example, they might look at someone’s credit score or income to ensure they won’t lose money.

• Banks also follow strict rules set by central banks to stay safe and stable.

7. How Do Banks Make Money?

Banks earn money in several ways:

• Charging interest on loans (higher than what they pay for deposits).

• Fees for services like account maintenance, ATM use, or international transfers.

• Selling financial products like mutual funds or insurance.

Central Banks and Regulation

• Each country has a central bank that controls how regular banks operate.

• Examples:

  • The Federal Reserve in the U.S.

  • The RBI (Reserve Bank of India) in India.

• Central banks decide interest rates, print money, and step in if the banking system is in trouble.

Why Are Banks Important?

• They help you save money safely.

  Example: Instead of hiding cash under your mattress, you can put it in the bank where it earns interest.

  
  

• They help businesses grow by giving loans.

  Example: A small bakery borrows money to buy better ovens, sells more bread, and hires more workers.

  
  

• They make payments and transfers easy.

  Example: Paying for your Netflix subscription or sending money to a friend instantly.