Banking

What Is A Bank?

What comes to mind when you hear the word bank? For most people, this includes a variety of financial institutions. Banks can be completely online or have local branches, and banks can be as small as one location in a small town, regional with branches in a geographic area, or national and even global with branches in every state and foreign countries.

For many, it is less clear that there is a technical distinction between banks and other financial institutions. Credit unions, for example, function very similarly to a traditional bank but have subtle distinctions. You may also hear of a thrift which is another type of bank. As used in this lesson, “bank” will include any financial institution where people deposit money which can then be used by the bank to fund loans. This is the primary definition of a bank.

Why Keep Money In A Bank?

Banks serve a number of important purposes and functions, some of which you may never utilize. Most people think of banking in terms of how it will benefit them. In this section, we will cover common reasons banks are used for depositing money.

Security. Both individuals and businesses can go bankrupt, meaning that they owe more than they are worth and generally have limited resources to cover the debts. In the business world, we may describe a bankrupt business as a failed business. What would happen if the bank failed? Throughout history, there have been times when people could not withdraw their entire account balance.

Deposits are insured (up to a limit), meaning that, if the bank should fail, your money up to the stated limit is guaranteed. A simple definition of insurance is a means to transfer risk in exchange for a fee. The Federal Deposit Insurance Corporation (FDIC) and National Credit Union Share Insurance Fund (NCUSIF) are two key insurance companies recognized under federal law to guarantee deposits. In 2021, the FDIC provides insurance for up to $250,000 of total deposits per account holder, per bank, per ownership category. Let’s explain that.

If you deposit $100 in Main Street Bank, it’s insured should the bank fail. Now, let’s say you had $300,000 to deposit. If all of this is one bank, you are insured up to $250,000, which means that you could lose $50,000 if the bank failed. If instead you had another person on the account with you, such as a parent, aunt/uncle or eventually a spouse, both of you are covered with FDIC insurance at separate $250,000 limits. Thus, the entire $300,000 would be safe.

If instead you kept your account at Main Street Bank and opened an account at Second Street Bank, you now have up to $500,000 of FDIC insurance protection because each bank is insured separately. If you kept $250,000 in Main Street Bank and put $50,000 in Second Street Bank, you would not lose any money if both banks failed. It is the same concept for different types of ownership, such as if you have an account in your own name and also have an account in the name of a business you own.

Convenience. What can be more convenient than cash under the mattress? Cash is certainly convenient, but it becomes less convenient when it comes time to pay bills. Banks, especially with online bill pay, make paying bills simple. Some employers only pay through direct deposit, which is an electronic transfer of funds, and sometimes you may receive checks. Banks make receiving direct deposits and depositing or cashing checks convenient. With online banking, transactions can be done on mobile devices as well as home computers. Automated Teller Machines (ATM) allow fast access to your money on deposit in the bank.

Cost. Many banks still offer free checking and savings accounts. Certain types of accounts can come with monthly maintenance fees, however, free accounts are commonly available. Debit cards which can be used at ATMs and stores are also usually free, making it easy to access and spend money in your account. Using a bank is generally less expensive than a check cashing store.

Safety. Money deposited in the bank is safe from theft, loss, and fire. These are inherent risks in keeping large amounts of cash in your home, car or wallet.

Types of Financial Institutions

Banks. Banks are private businesses with a board of directors, officers and shareholders. Smaller banks are privately owned, and many larger banks are publicly traded, which means shares of their stock are available for public purchase in the stock market. Banks make loans available to their customers, pay checks on behalf of account holders who write checks, accept deposits, pay interest on certain deposit accounts, and provide other services. Banks are FDIC insured and chartered as national banks (symbolized with the N.A. after the bank name). National banks are regulated under the National Bank Act and the Office of the Currency Controller, which is a division of the U.S. Treasury.

Credit Union. Credit unions offer very similar services to their account holders as banks. There are a few key differences, however. Credit unions are regulated by the National Credit Union Administration (NCUA) and are federally chartered under the Federal Credit Union Act. The President of the United States appoints the head of the NCUA, and it acts as an independent agency within the federal government. Credit unions often require membership to be an account holder, and credit unions are often formed to serve a particular group of people. For example, credit unions can serve state employees, employees of a large corporation, or be open to the general public. Members can actually have a vote in the administration of the credit union.

Savings and Loan (Thrift). A lesser known type of financial institution is the savings and loan, also known as a thrift. Older people will remember savings and loans for their failures in the 1970s and 1980s. As with banks and credit unions, savings and loans offer similar services to account holders. Savings and loans are formed under the Home Owners’ Loan Act and regulated by the Board of Governors of the Federal Reserve System, in which is the Office of Thrift Supervision. Like banks, savings and loans are insured through the FDIC.

Opening A Bank Account

Opening a bank account is not as simple as it once was. Regulation such as the Patriot Act has created requirements that financial institutions must fulfill and document when an account is opened. Beyond the regulation, banks also want to make sure they will not lose money having you as a customer. When opening a bank account, you should expect the bank to:

  • Verify that you will be a responsible bank account customer. If you have not been a good banking customer in the past, they may not want to risk having you as a customer. For example, if you have a history of overdrawing your account, writing checks for more than your balance or losing your debit card, the bank may deem you to be an increased risk.
  • Verify your identity. This is not as involved as obtaining a drivers license, however, you will have to present government-issued photo identification, proof of residence, and Social Security Number, among other identifying documents.
  • Provide the initial deposit. A starting amount of money is usually needed to open a bank account, which can be a deposit of cash or a check.

Activity

George opened a bank account and deposited $500 in cash. The next day, he wrote a check for $70 to pay his electric bill. At the end of the week, he received a paycheck for $870 and deposited it into his account. What is the balance in George’s account after he made the payment (or withdrawal) and deposit?

DescriptionDepositWithdrawalBalance

Types of Bank Accounts

Financial institutions provide deposit accounts in which you can add or deposit money. Checking and savings accounts are two examples of deposit accounts.

A checking account allows you to write checks on money deposited, pay bills, and buy goods and services with the money you have deposited. Therefore, when you write a check, use an ATM or debit card, or bank online, the financial institution takes the money from your account and pays it to the designated person or business. Some checking accounts may earn interest.

A savings account generally earns interest. It usually cannot be used like a checking account, and the number of monthly transactions may be limited. Withdrawals are usually in the form of cash to yourself or a transfer between accounts. A savings account may allow you to use an ATM or debit card on a limited basis.

You can usually also access your funds on deposit by requesting a wire transfer, cashier’s check or money order. These forms of payment are considered to be as good as cash. Checks, for example, may be declined for payment by the bank if there is not enough money on deposit in your account. A wire transfer, cashier’s check and money order can only be funded with cash. Wire transfers are electronic transfers of money and are often used when purchasing a home. Cashier’s checks and money orders are very similar to checks and, although are not used as frequently, are recognized to be a guaranteed source of funds.

Monthly statements are issued on accounts. The purpose of the statement is to list all of your deposits, withdrawals, fees charged to your account, ATM and debit transactions, checks written, and other messages to you.

Many financial institutions also offer non-deposit accounts that have limited insurance protection. These include stock, bond, and mutual fund accounts and are created to help you invest deposits. Non-deposit accounts carry some level of risk, meaning that you could lose some or all of the money that you invest in these products.

Bank personnel should provide a written explanation that non-deposit accounts are not insured and may lose value. It is important to understand these products and services before you use them.

Banks Vs. Other Financial Services

Before we conclude this lesson, we should touch on non-bank businesses which offer financial services, including check cashing services and loans. Although some may be outlawed in various states, non-bank businesses offering financial services include:

  • Check cashing services
  • Payday lending services
  • Title loan services
  • Pawn shops
  • Personal loan lenders
  • Pre-paid debit/credit card fees paid at the time of purchase

In general, these businesses, while offering similar services as banks, charge much higher fees than would be charged at a bank, credit union or savings and loan. The fees that must be considered are not just one-time transaction fees but also interest on loans. Payday and title loan services can carry exorbitant or usurious interest rates disguised as transaction fees, which is one reason some states have banned them.

If you are budgeting well and being careful with your spending, you should not need to utilize any of these services.

Fees Charged By Banks

Since we are on the topic of fees, we should also discuss some of the typical fees you may find at your bank. These include:

  • Monthly maintenance fee on certain types of checking and savings accounts. Some banks waive the fee if the amount you have on deposit is above a certain amount.
  • Overdraft and non-sufficient funds (NSF) fees may be charged when you spend more from your bank account than is on deposit.
  • ATM fees which may be charged if you do not use an ATM within the bank’s network. There are usually no fees charged to you for using a bank debit card at stores or at the bank’s own ATM. Some online-only banks may waive these fees.
  • Transaction fees that may be imposed on certain types of bank accounts, especially savings accounts, if you have more withdrawals than allowed in your account agreement with the bank.
  • Wire transfer fees, if you request that the bank withdraw money from your account to make a wire transfer.
  • Money order and cashier’s check fees, which are only charged if you request the service.

In general, most of these fees are avoidable with advance planning.

Who Works At The Bank

Employees at the bank have various roles, and you may interact with several different people depending on the service you need. Here are the main roles people fill at the bank:

  • Teller – this is the person behind the counter or in the drive-through window who takes your deposits and assists with withdrawals, cashing checks, and creating money orders or cashier’s checks.
  • Customer Service Representative – this individual is often in one of the offices near the tellers and assists with opening a new account, answering questions and starting loan applications.
  • Loan Officer – Some banks may have Customer Service Representatives also serve as Loan Officers, however, other banks will have dedicated Loan Officers whose job it is to assist with making new loans, home mortgages and vehicle purchase loans.
  • Branch Manager – This is the person responsible for operations at the bank location. If you are unsuccessful in having an issue resolved with any other employee, the Branch Manager may need to become involved.