What is a bank?
A bank is a financial institution that handles money from individuals, companies, and organizations and pays interest on it. A bank facilitates money transactions, fund transfers, payments, and other financial transactions, as well as providing a safe place for people to deposit money.
Banks are generally divided into two main categories:
1. Commercial banks: These generally take deposits from individuals and companies, make loans to them, issue debit and credit cards, and provide facilities such as savings accounts.
2. Central banks: These types of banks control inflation. They regulate other banks and control the supply of money in the economy. These banks are considered to be the supreme banks. For example, banks like the Reserve Bank of India (RBI) and the Federal Reserve of the United States.
How Banks Function
Banks provide many services that are very important for the economy. Let's understand it in a simple way.
Banks accept money, that is, people and companies deposit their money in the bank for safety. For this, they provide different facilities like savings accounts, current accounts, and fixed deposits. Depositing money in a savings account earns interest. Current account traders use money in their daily transactions; sometimes, they also pay money to the bank for special facilities.
Another function of banks is to give loans. Individuals get loans to buy a house, for education, or to run a business. Regular interest is charged on the loan, and that interest is the main source of income for banks.
Banks also make payments and transfers of funds easily. In today's technological era, it has become very easy to send money and pay bills with facilities like mobile applications, internet banking, debit-credit cards, and UPI. We can do money transactions very well, even sitting at home, and that too in a very short time.
Apart from that, banks earn money by investing in government securities, bonds, and other financial instruments.
Another important function of banks is to provide security. Banks keep your money safe so that the risk of theft or loss is reduced.
How Banks Make Money
Banks are a type of business. Their main income comes from the interest spread. When you deposit money in a savings account, the bank gives you 3–4% interest on the amount. The same money is lent to someone at an interest rate of 8–12%. The difference (spread) between the two is the bank's profit.
For example, if you deposit ₹1,00,000, the bank gives you ₹4,000 in interest. By lending the same money at 10% interest, the bank earns ₹10,000. After paying your interest, the bank is left with a profit of ₹6,000.
Banks also earn from various fees and charges, such as ATM charges, account maintenance fees, loan processing fees, credit card fees, foreign exchange fees, etc. Since banks have millions of customers, even these small fees give a big income.
Banks also earn money by investing in government bonds and securities. Some banks also provide services like insurance, wealth management, and advisory, which earn the bank a good income.
Thus, banks keep as much cash as they are required to keep in cash as per the regulations and invest the rest as per the above to earn income.
Key Banking Terms Beginners Should Know
Interest: Interest is the amount paid on a loan or the amount received on a deposit in a bank account.
Collateral: Collateral is the property kept against it while taking a loan.
Credit Score: A number that shows your loan repayment capacity.
Fixed Deposit (FD): An amount deposited in a bank for a fixed period of time, on which higher interest is earned.
Overdraft: A facility to withdraw more than the money in the account.
UPI: A system to transfer money instantly through mobile.
How Technology is Changing Banking
Due to changes in modern technology, some changes are also seen in the banking industry. Due to digital transformation, banks are now providing their customers with fast, secure, and easy financial services. Through digital banking, mobile apps, and e-banking, customers can now manage their accounts, view transactions, and make payments from the comfort of their homes.
Artificial Intelligence (AI) and chatbots provide 24 hours customer service. AI-powered chatbots respond to queries instantly, provide loan and account-related information instantly, and make the customer experience more convenient.
Blockchain technology is being used to enhance security and transaction transparency in banking. Blockchain reduces fraud, makes it easier to monitor and verify transactions, and increases trust.
Payment technology provides fast and secure payment facilities for customers. With UPI, CONTACTLESS CARDS, QR code payments, and mobile wallets, people can make payments in a matter of seconds. Thus, banking has become easier and more convenient.
Data analytics and Big Data-based services help banks to provide personalized products. By understanding the customer’s spending and transaction patterns, banks can offer customized offers for investment plans, fixed deposits, and loans.
Loan and credit services have also become easier with technology. With AI-based credit scoring and remote loan applications, customers can get loans faster, while reducing the risk for banks.
In the future, technology will bring more revolutions, such as robo-advisors, IoT-based Open Banking, and private blockchain banking. All these innovative services are making banking faster, safer, and customer-centric.
Final words
Banks are the pillars of the entire financial system. They provide security to savers, promote businesses by giving loans, and drive the entire economy forward. Banks play a very important role in an economy. Sometimes, to bring control, banks increase interest rates so that people spend less money, and the cash balance in the economy remains at a proper level. Thus, banks are an invaluable part of people's lives, and along with that, they also play a major role in the entire economic system.
Whether you are saving for the future, applying for a loan, or making a digital payment, banks will always be at the center of financial life.
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