When you open a checking account, it is typically free. Have you ever wondered how a bank makes its money? How does it afford its physical locations, call centers, websites, personnel expenses, etc.?
Banks operate by accepting customer deposits and lending those funds to borrowers or investing those funds. Even more simply put, banks make a lot of their money on the money you have in your account. The money you have in your debit or savings account is an asset to you. An asset is something of value owned by an individual, organization, or entity that has the potential to generate future economic benefits. The same funds that are an asset to you are listed as a debt on the bank's balance sheet because they owe you that money. Banks also earn profits through investments, trading activities, and offering their customers other financial products and services.
Banks must prioritize responsible risk management to safeguard the funds entrusted to them. Instances of bank collapse in 2008 and 2023 resulted from inadequate risk management practices and irresponsible lending. However, it is crucial to highlight that the FDIC (Federal Deposit Insurance Corporation) ensures the safety of deposits up to $250,000. This means that even in banking crises, the federal government guarantees the protection of depositors' funds, ensuring no money is lost. The FDIC does not insure investments, crypto exchanges, or cover cryptocurrency.
The bank pays you interest when you deposit money into various accounts, mainly savings accounts. The bank pays you interest because they are using your money for various financial activities. It is crucial that you shop around for a bank that gives you the best rate. As long as the account is FDIC insured, your money is safe.