A bank is a business that holds your money and lends it out

A bank is a company licensed by the government to take deposits — money you give them to hold — and lend that money to other people and businesses. In return, the bank pays you a small amount of interest on your deposit, and charges borrowers a higher interest rate on their loans. The difference between what they pay you and what they charge borrowers is how the bank makes money.

The key thing to understand is that your money at a bank is not sitting in a vault with your name on it. The bank uses deposits from thousands of customers to fund loans to other customers. This is how banking works everywhere. Your deposit is insured by the federal government up to $250,000 through the Federal Deposit Insurance Corporation (FDIC), so even if the bank fails, you get your money back.

Key Takeaways

  • A bank takes deposits from customers, pays them interest, and lends that money to borrowers at a higher rate.
  • The FDIC insures deposits up to $250,000 per account holder per bank, protecting your money if the bank fails.
  • Banks offer checking accounts for daily spending, savings accounts for money you want to keep, and loans for larger purchases.
  • You can visit a physical branch, use an ATM, or bank online — most banks now offer all three.
  • Banks charge fees for some services, so reading the fee schedule before opening an account helps you avoid surprises.

How banks make money from your deposits

When you put $1,000 in a savings account at 4% annual interest, the bank pays you $40 per year. But the bank then lends that $1,000 to someone buying a car, charging them 7% interest — so the bank collects $70 per year on that same $1,000. The $30 difference is the bank's profit on that transaction, minus the cost of running the branch and paying staff.

This is why banks want your deposits. The more money customers deposit, the more the bank can lend out. And the longer you leave money in the bank, the more interest they earn on it. This is also why banks pay you almost nothing on a checking account (where money moves in and out constantly) but slightly more on a savings account (where money typically sits longer).

The difference between a bank and other places that hold money

A credit union works similarly to a bank but is structured as a non-profit owned by its members rather than shareholders. Credit unions often charge lower fees and pay slightly higher interest, but they may have fewer branches or ATMs. A savings and loan (or thrift) is licensed to take deposits and make loans, usually focused on home mortgages. Both are insured by the FDIC or a similar federal agency.

A money services business — like a check-cashing store or wire transfer service — can hold money temporarily but is not licensed to take deposits the way a bank is. These businesses are riskier because your money is not federally insured. A brokerage holds stocks and bonds for you but is not a bank; it is a different kind of financial company with different insurance rules.

What you can do at a bank

Most banks offer a checking account for everyday spending — you deposit money, write checks, use a debit card, and set up automatic bill payments. They offer a savings account where money sits and earns interest, usually with limits on how many times per month you can withdraw. Many banks also offer money market accounts (a hybrid that earns more interest but requires a higher minimum balance) and certificates of deposit (CDs) (accounts where you agree to leave money untouched for a set time period in exchange for higher interest).

Banks also make loans: personal loans for any purpose, auto loans for vehicles, mortgages for homes, and home equity lines of credit that let you borrow against the value of a home you own. Many banks offer credit cards, which are a form of short-term loan. Some offer investment services, though usually through a separate division.

How to access your bank account

You can visit a physical branch during business hours to deposit cash, withdraw money, or speak to a banker about loans. You can use an ATM (automated teller machine) to deposit checks, withdraw cash, and check your balance 24 hours a day — some ATMs charge a fee if you use a machine owned by a different bank. You can also bank online through the bank's website or mobile app, where you can transfer money, pay bills, deposit checks by taking a photo, and monitor your account.

Most banks now offer all three options. Some banks operate only online with no physical branches; these typically charge lower fees because they have fewer buildings and staff to pay for. Online-only banks still have FDIC insurance and work the same way as traditional banks — they just have no place you can walk into.

Bank fees and how to avoid them

Banks charge fees for various services. A monthly maintenance fee is charged just for having the account open — this ranges from $0 to $15 per month depending on the bank and account type. An overdraft fee is charged if you spend more money than you have in the account; this can be $25 to $35 per overdraft. An ATM fee is charged if you use an ATM owned by a different bank, usually $2 to $3 per transaction.

Other common fees include charges for wire transfers, for closing an account within a certain time period, for ordering checks, and for falling below a minimum balance. The best way to avoid fees is to read the fee schedule — a document the bank must provide before you open an account — and choose an account with no monthly fee if possible. Many banks waive the monthly fee if you keep a minimum balance or set up direct deposit of your paycheck.

How to choose a bank

Start by deciding whether you want a physical branch you can visit or whether online banking is enough for you. Then compare the fee schedules of banks in your area or online banks that serve your state. Look at the interest rates they pay on savings accounts and money market accounts — these vary significantly between banks. Check whether they have ATMs near your home or work, or whether you are comfortable using any ATM and paying the fee.

If you are new to banking, look for a bank that offers free checking with no minimum balance and no monthly fee. Many community banks and credit unions are designed for people starting out and have staff who can explain how accounts work. Once you have chosen a bank, you will need a government-issued photo ID and usually a Social Security number or tax ID to open an account.

Frequently Asked Questions

What happens to my money if the bank goes out of business?

The FDIC insures deposits up to $250,000 per account holder per bank. If the bank fails, the FDIC pays you back directly, usually within a few days. If you have more than $250,000 at one bank, only the first $250,000 is insured — this is why some people split large amounts across multiple banks.

Can a bank take my money without permission?

A bank can only take money from your account if you authorize it — through a check you write, a debit card transaction you make, a bill payment you set up, or a loan agreement you sign. If someone takes money without your permission, that is fraud, and you should report it to the bank when ready. Banks have procedures to investigate unauthorized transactions.

Why do banks ask so many questions when I open an account?

Banks are required by federal law to verify your identity and to report suspicious activity to prevent money laundering and terrorism financing. They will ask for your name, address, date of birth, and Social Security number. This is normal and protects both you and the bank.

Is my money safer at a bank or under my mattress?

Your money is safer at a bank. It is insured by the federal government, you earn interest on it, and you can access it anytime. Money hidden at home can be stolen, lost in a fire, or damaged. The only reason to keep cash at home is for small amounts you need when ready access to.

Do I need a bank account to get a loan?

Most banks require you to have a checking account with them before they will lend you money. Some credit unions and online lenders are more flexible. Having a bank account also helps you build a financial history, which lenders look at when deciding whether to lend to you.