SIMPLEST REASON FOR A BANK:
To safely store our money.
But banks cannot be there to just look after our money without making some money for itself. Otherwise, how will the staff get paid?
So, banks have a business of their own.
How do banks make money?
The business of banking is rather complex. I will share with you a very simple business model of banks just so you get an idea of how they work. As you grow older, you can learn more on the complexity of how banks make money.
Let’s say you have $500 that you want to deposit in a bank for safekeeping.
Putting money in the bank is usually regarded as a safer way to safeguard our money than putting it under our mattress. I’ll leave it to you to think about why that is the case.
The bank will not keep all your money in their vault. In fact, they will lend out the money to those who need to borrow money for whatever purpose, at a cost. That cost is called the interest.
When the borrower returns the borrowed money to the bank, they also have to pay the interest. The bank will keep the interest for itself and you, as the depositor, can still get back all of your $500.
But what if I need to withdraw my $500 before the borrower of the money returns it to the bank?
Do not worry, banks will not lend out all the depositors’ money. They will keep a reserve in their vault so that at any point in time, they will have enough money for their customers to withdraw.
Another way banks make money is by using your money to invest. I will write about that another time.