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Consumer Ed 7.1 Notes: How Banks Work
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The Role of Banks
• The bank makes money from the interest they earn from borrowers.
o For example, if you deposit $100 in your savings account, you receive 4% interest.
o If you borrowed $100 from a bank and they charge you 10% interest.
o The 6% difference is the bank’s income.
• Banks are more than just a place to keep your money.
• Banks provide many vital services that benefit consumers and the economy.
• The money they lend comes mostly from deposits.
• People who deposit money receive interest on their accounts.
• Depositors receive less interest on their accounts than borrowers.
Banks Provide Security
Protect Your Money’s Purchasing Power
• This income allows banks to pay for its costs and earn a profit.
• Banks also earn income from:
o Charging fee for credit cards and checking accounts.
o Helping customers with financial planning (they charge a fee).
o Most banks’ income comes from the interest charged on loans.
• Banks have vaults, employ guards, and use electronic surveillance systems.
• If money is stolen, banks have insurance to cover the loss.
• Money kept at home is not safe. Burglars break into thousands of homes every day.
• Money loses its some of its value over time.
• Purchasing power: The amount of goods or services that your money can buy.
• The interest you receive from your bank deposit helps protect the purchasing power of your money.
Banks are in Business to Earn a Profit
• Banks are private businesses.
• They work to earn a profit by selling financial services.
• Most income comes from interest they charge when they lend money.