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How Does Banking Work?

Chances are you already have a bank account or two. But, have you ever wondered how exactly banking works? Here, we take you through how banks work and the various types of banks that are present in the country. 

How Banking Works

Banks offer customers a safe place for depositing their cash. They also offer a wide range of financial services to people, including savings accounts, checking accounts, CDs, and loans. When you deposit your money in a bank, the bank pays you interest on the sum you’ve deposited. Usually, traditional brick-and-mortar banks pay their customers a modest interest, while credit unions and online lenders pay more. Banks make money by providing people loans and charging a higher rate of interest for the loan than what they pay for deposits. 

Types of Banks

Banks can be grouped into different categories depending upon the type of business they conduct.

  • Commercial banks: Commercial banks provide services to individuals and business establishments.
  • Retail banks: These banks provide credit, deposit, and money management expertise to individuals.
  • Local community banks: Community banks are smaller commercial banks. They provide their services to the local market.
  • Savings and loans: These are specialized banking entities created to promote affordable homeownership. These banks may offer a higher rate to depositors since they need to raise funds to provide mortgage loans. 
  • Credit unions: Credit unions are banking entities owned by their customers. These customers could be employees of companies, schools, or residents of a geographical region.
  • Investment banks: Investment banking deals in initial public stock offerings or bonds. They also manage mergers and acquisitions of companies.
  • Online banks: Most banks provide online banking or internet banking services to their customers. But, they also have physical branches that customers can visit if they need to. Online banks, on the other hand, shave no physical branches. Given this, these banks actually save a lot of money on overhead expenses, which usually get passed onto customers in the form of a higher interest rate. 

The banking sector is one of the most important drivers of the economy of the country. It gives families and businesses the necessary liquidity for investment opportunities. And, by way of credit solutions and loans, banks help people reach their financial goals without having to save up for years. Organizations also use loans to build their business, hire employees, and further their expansion plans.