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Money and Finance

How Banks Work

What is a bank?

A bank is a business that accepts and holds money for people. Banks pay interest in return for holding money. Banks make money by loaning money out to other people and businesses at a higher rate of interest.

Why are banks important?

Banks are very important to the economy. They help money flow and business to occur. On one hand, banks provide the service of keeping people's savings safe. On the other hand, they use that money to help people buy houses, cars, and start businesses. Banks are an essential part of the modern economy.


One of the main functions of a bank is to accept and hold deposits. Deposits are money that people put into a bank. There are two main types of accounts that people have.

Checking Account - A checking account is an account where people can get easy access to their money. They can use their money in the checking account by writing checks or using a debit card. There are often fees associated with checking accounts and possible minimum balance requirements.

Savings Account - A savings account is mostly for savings. These accounts have less services and access than checking accounts, but typically offer higher interest and less fees.

Other types of accounts at banks include CDs (Certificate of Deposit), Money Market Accounts, and IRAs (Individual Retirement Accounts).


Getting money in and out of your bank account is called a transaction. There are a number of ways to put money in or take money out. The most obvious way is to go to the bank physically and get your money or give them money. Some other ways include:

Check - One of the oldest ways to use money in a checking account is by writing a check. Once the check is written out for a certain value and signed, the person or business who it is written to can go to their bank and get the money.

ATM - ATM stands for Automated Teller Machine. Banks often offer a card that you can use at ATMs which may be located in different places like a grocery store or a gas station. With this card and a password, the ATM will give you cash and deduct it from your bank account.

Debit Card - A debit card is a card you can use to buy things directly. Debit cards work similar to credit cards, but the money comes directly out of your bank account.

Electronic Transactions - Money can even be moved in and out of a bank account electronically. Many people get their paychecks sent directly to their bank account using direct deposit. The money is sent electronically from their employer's bank right into their checking account.


What do banks do with all of the money they get? They loan it out to other people and businesses. They make money by charging a higher rate of interest on loans than they pay for deposits. Banks provide loans for people to buy cars, houses (a home loan is called a mortgage), and to start businesses.

What if the bank goes out of business?

You might think your money is completely safe, but what if the bank is robbed or goes out of business? Today, this isn't too much of a problem. Most bank deposits (up to a certain amount) are protected by the U.S. government through the Federal Deposit Insurance Corporation (which is usually just called the FDIC).

Interesting Facts About How Banks Work

Learn More about Money and Finance:

Personal Finance

Filling out a Check
Managing a Checkbook
How to Save
Credit Cards
How a Mortgage Works
How Interest Works
Insurance Basics
Identity Theft

About Money

History of Money
How Coins are Made
How Paper Money is Made
Counterfeit Money
United States Currency
World Currencies
Money Math

Counting Money
Making Change
Basic Money Math
Money Word Problems: Addition and Subtraction
Money Word Problems: Multiplication and Addition
Money Word Problems: Interest and Percent


How Banks Work
How the Stock Market Works
Supply and Demand
Supply and Demand Examples
Economic Cycle
Adam Smith
How Taxes Work
Glossary and Terms

Note: This information is not to be used for individual legal, tax, or investment advice. You should always contact a professional financial or tax advisor before making financial decisions.

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