How Banks Operate – The Fundamentals of Banking

Introduction

Many people just hate banks. They think that banks are a devil in human form and that they just want to fill their pockets. While the second part of the sentence is true – banks indeed work to fill their pockets and make a profit (as any other business), they certainly aren’t a devil. In fact, in some cases, banks can be referred to as “angels” since, without them, you wouldn’t be able to buy that sweet car of yours or go on an unforgettable trip to Hawaii. Anyways, the stigma that banks are bad still exists nowadays, and some people don’t want any connection with them.

Still, chances are that even if you don’t want a connection with banks, at least once in your lifetime, you’ll surely come in a situation where you and banks cross paths. When that happens, all that cursing of banks won’t help you – you need to know what banks want and how they operate. In this article, we’ll talk about the fundamentals of banking and we’ll learn how ban

Banking

We’ll be direct here – banking is very complex. Some people study for years before they understand every little transaction in the banking system. But, for an average Joe, this isn’t that important. For Joe, what’s important is the fact that he/she realizes what are the basic ways banks work and how to recognize them.

One of the most recognizable roles of banks is the role of the borrower. Basically, banks have a tremendous amount of money. Since this amount is centralized, banks can offer it to possible clients which then repay the amount borrowed with interest included. Interest – a small percentage of the borrowed amount which you need to add on top of the borrowed amount when you return it. Not too complicated for now? Banks borrow money to many users and they all need to return that money in a specific time frame or they will face penalties.

Another thing that banks do is called transaction intermediaries. It might sound complex, but it isn’t. Let’s put it this way. You want to buy a pair of shoes in a store. So now you give your bank card to the salesman and he/she takes the funds of your card equivalent to the price of the shoes. This is what you see. But, the backend is where the magic happens. When you buy the shoes, the money from your bank is virtually transferred to the bank of the shop. The bank is an intermediary in this case or in simpler words – it transfers money between two parties. In most cases, a small fee is being charged in every single purchase, so you can now imagine how much money virtually floats after every purchase – even after buying bubblegum.

Conclusion

Banks do a lot more things such as fascinating stock or bond issues or working with investors and their interest. For an average bloke, this isn’t such a big deal. Hopefully, after reading this article, you got to know some basic ways how banks work so that you are prepared if you ever cross paths with them.