Understanding how banking works
From safeguarding individuals’ savings to administering personal and business loans, banks play an integral role in maintaining financial stability while promoting economic activity. A 2023 FDIC survey found that 96 percent of U.S. households are banked, meaning they have an account with a traditional bank.
But despite the importance and prevalence of banks in the U.S., it can be easy to overlook exactly what banks do and the ways in which you can best work with one. Here’s an overview of how banking works.
The concept of banking
To understand how banks work, it helps to understand the concept behind it. A bank is a financial institution that holds funds deposited by individuals and businesses, which in turn gives the bank a large pool of money it can lend out to borrowers.
Ultimately, a bank serves as the middleman between borrowers and depositors. Individuals and businesses are incentivized to deposit their money in a bank account because it is secure and depending on the account can yield interest earnings over time. Banks are incentivized to lend money to borrowers because they will make the money back plus interest payments on the loans.
Banking can be broken down into four basic steps:
- You deposit your money into a savings account with a bank
- You earn interest from the bank
- The bank keeps the remainder of the money you deposited, lending it out to individuals and businesses in the form of loans
- Individuals and businesses who borrowed from the bank pay back their loans, with interest
How a bank can help you
Banks offer tools and services that can help you manage your day-to-day expenses as well as helping you finance significant purchases, such as a mortgage or a new car. To many, banking is seen as nothing more than a basic financial chore. But if you have lofty financial goals or challenges, banks can provide competitive resources and strategic advice to navigate a range of situations.
Among the most commonly utilized tools are savings accounts, which is an easy and secure way to store any extra cash that you don’t need to spend in the near future. In addition to giving you peace of mind that your hard-earned money is safe, a savings account typically earns you an agreed-upon interest rate. While savings accounts usually provide easy access to your funds, there are sometimes limitations, making a checking account a helpful tool when it comes to regular spending.
Banks also issue credit cards and lines of credit, which are important tools for financing large purchases that you might not be able to pay for right away. These tools allow you to repay the full balance of a purchase at a later date, which can be helpful if you’re on a tight budget.
Taking on a mortgage might be the most monumental interaction you’ll have with a bank, as this enables you to finance the significant expense of a home over the course of multiple decades. Most people don’t have, say, $250,000 laying around to purchase a new home. But when you work with a bank, you can work out an agreement where you pay a small percentage of the home value up front and then pay off the remaining value, plus interest, over the years that follow.
The role banks play in your community
In addition to helping you navigate the challenges of day-to-day finances and helping you pursue milestones like car or home ownership, banks - particularly local, community banks - play a unique role in promoting economic activity around you.
Deposits made to a local bank get redistributed in the form of mortgages and small business loans to neighbors throughout your community.
Getting started with Westfield Bank
Westfield Bank makes banking easy and effective for you with competitive rates and personalized service. Don’t pursue your financial goals - both big and small - alone. From purchasing a home to budgeting more effectively, Westfield Bank has the tools and resources to help you on your journey, Including:
- Online and mobile banking to manage your money anytime, anywhere
- Checking and savings accounts with competitive rates
- Loans and lines of credit to reach your financial goals
- Retirement accounts to plan for your future
- A banking team invested in your success
