Do you really need a bank?,How Banking Works
What Exactly Is a Bank?
A bank is a type of financial institution that is authorized to accept checking and savings deposits as well as make loans. Individual retirement accounts (IRAs), certificates of deposit (CDs), currency exchange, and safe deposit boxes are all services offered by banks.
Banks are classified into three types: retail banks, commercial or corporate banks, and investment banks.
Banks in the United States are regulated by both the federal government and the individual states.
Understanding Financial Institutions
Banks have been around since the 14th century. They serve as a safe deposit box for consumers and business owners, as well as a source of loans for personal purchases and business ventures. In turn, banks use the deposited funds to make loans and collect interest on them.
Since the Medici family began dabbling in banking during the Renaissance, the basic business plan hasn't changed much, but the range of products that banks offer has expanded.
Standard Banking Services
Banks provide numerous ways to store your cash as well as numerous ways to borrow money.
Accounts for Checking
Checking accounts are deposits used by individuals and businesses to pay bills and withdraw cash. They typically have monthly fees, usage fees, or both, and pay little or no interest.
Nowadays, most people have their paychecks and other regular payments deposited automatically into one of these accounts.
Accounts for Savings
Savings accounts pay the depositor interest. Depending on how long account holders intend to keep their money in the bank, they can open a regular savings account with a low-interest rate or a certificate of deposit (CD) with a higher interest rate. CDs can earn interest for as little as a few months up to five years or more.
It is important to note that money in checking accounts, savings accounts, and CDs is insured by the federal government up to a maximum of $250,000 through the Federal Deposit Insurance Corp. (FDIC).
Services for Loans
Banks make loans to both individuals and businesses. Customers' cash deposits are lent out to other customers at a higher rate of interest than the depositor is paid.
At its most basic, this is the process that keeps the economy running. People deposit money in banks, and the banks lend it out in the form of car loans, credit cards, mortgages, and business loans. The loan recipients spend the money that they borrow, the bank earns interest on the loans, and the cycle continues.
A bank's goal, like any other business, is to make a profit for its owners. The majority of banks' owners are their shareholders. Banks accomplish this by charging borrowers higher interest rates on loans and other debt than they do on savings accounts.
For example, a bank may pay 1% interest on savings accounts while charging 6% interest on mortgage loans, earning its owners a 5% gross profit.
Note: Banks make money by charging higher interest rates on loans than they do on savings accounts.
Banks, both traditional and online
Banks range in size from small community-based institutions to large multinational corporations.
As of 2021, there were just over 4,200 FDIC-insured commercial banks in the United States, according to the FDIC.
National banks, state-chartered banks, commercial banks, and other financial institutions are included in this total.
Traditional banks now provide both physical branch locations and online services. Online-only banks first appeared in the early 2010s.
Customers choose a bank based on several factors, including interest rates, fees, and the convenience of its locations.
How are banks governed?
Following the global financial crisis of 2008, US banks came under intense scrutiny. As a result, the regulatory environment for banks was significantly tightened.
Banks in the United States may be regulated at the state, national, or both levels, depending on their business structures. Each state's department of banking or department of financial institutions regulates state banks. This agency is in charge of things like permitted practices, how much interest a bank can charge, and auditing and inspecting banks.
The Office of the Comptroller of Currency regulates national banks (OCC). The OCC primarily regulates bank capital levels, asset quality, and liquidity. As previously stated, banks that have FDIC insurance are also regulated by the FDIC.
Dodd-Frank Act Following the financial crisis, the Wall Street Reform and Consumer Protection Act was passed in 2010 to reduce risks in the US financial system. Large banks must now submit to regular tests to determine whether they have enough capital to continue operating in difficult economic conditions under this act. This annual evaluation is known as a stress test.
Banks of various types
The majority of banks are classified as retail, commercial or corporate, or investment banks. Large global banks frequently have separate arms for each of these categories.
Retail banks provide services to the general public and typically have branch offices as well as main offices for their customers' convenience.
They offer a variety of services, including checking and savings accounts, loan and mortgage services, auto financing, and short-term loans such as overdraft protection. Many of them also provide credit cards.
They also provide access to CDs, mutual funds, and individual retirement accounts (IRAs). Larger retail banks also provide specialty services to high-net-worth individuals, such as private banking and wealth management.
TD Bank and Citibank are two examples of retail banks.
Banks for businesses or corporations
Commercial or corporate banks cater to business clients ranging from small business owners to large corporations. These banks provide credit services, cash management, commercial real estate services, employer services, and trade finance in addition to day-to-day business banking.
Commercial banks include JPMorgan Chase and Bank of America, both of which have significant retail banking divisions.
Banks of Investment
Investment banks specialize in providing complex services and financial transactions to corporate clients, such as underwriting and assisting with merger and acquisition (M&A) activity. In these transactions, they primarily serve as financial intermediaries.
Large corporations, other financial institutions, pension funds, governments, and hedge funds are among their clients.
Morgan Stanley and Goldman Sachs are two of the largest investment banks in the United States.
Central banks, unlike the banks mentioned above, do not deal directly with the public. A central bank is an independent institution that is mandated by a government to supervise the nation's money supply and monetary policy.
As such, central banks are accountable for the currency's and the economic system's overall stability. They also play a role in regulating the nation's banks' capital and reserve requirements.
The Federal Reserve Bank of the United States is the country's central bank. Its counterparts in other countries include the European Central Bank, the Bank of England, the Bank of Japan, the Swiss National Bank, and the People's Bank of China.
Choosing Between a Bank and a Credit Union
Credit unions provide banking services, but unlike banks, they are not-for-profit organizations founded and run by their members or customers. Credit unions offer routine banking services to their clients, known as members.
Credit unions are generally tax-exempt because they are founded, owned, and operated by their members. Members buy shares in the cooperative, and the money is pooled to fund the credit union's loans.
In comparison to banks, they typically offer a more limited range of services. In addition, they have fewer locations and automated teller machines (ATMs).
How Can I Be Sure My Money Is Safe in a Bank?
The Federal Deposit Insurance Corporation (FDIC) is an independent agency established by Congress to maintain financial stability and public trust in the United States. The FDIC monitors and inspects banks to ensure that the money they handle is secure.
It also protects your money. For each account ownership category, the insurance maximum is $250,000 per depositor, per insured bank.
You are not required to purchase this insurance. You are automatically protected if you open a deposit with an FDIC-insured bank.
The FDIC's BankFind website can assist you in locating FDIC-insured banks and branches.
Are there any non-bank accounts that are insured?
The Securities Investor Protection Corporation's (SIPC) mission is to recover cash and securities if a member brokerage firm fails. SIPC is a non-profit corporation established by Congress in 1970. SIPC safeguards the customers of all registered brokerage firms in the United States.
This applies to stocks, bonds (securities), and cash held by a brokerage firm. Brokerage firms rarely fail or close abruptly, but if this happens, the SIPC assists in liquidating the firm and establishing claims processes to protect the investor. SIPC safeguards your account up to $500,000 in securities.
This includes a cash limit of $250,000 in your account. This link will take you to a list of all SIPC members who have registered.
Should I open an account with a retail bank, a credit union, or a commercial bank?
You should consider whether you want to keep your business and personal accounts at the same bank or at different banks. A retail bank, which provides basic banking services to customers, is best suited for everyday banking.
If you don't want or need to visit a bank branch, you can choose between a traditional bank with a physical location and an online bank. Consider a credit union, which is a nonprofit institution that serves the needs of people who share an employer, labor union, or professional interest.
What Other Factors Influence Bank Selection?
Another factor to consider is the size of the bank. Large retail banks are frequently well-known, big-name banks with locations across the United States, which is convenient if you travel frequently for work or vacation. When you travel, you will have easier access to your funds and may be able to avoid foreign ATM fees.
Otherwise, a smaller bank may provide more personalized customer service and the products you prefer. A community bank, for example, accepts deposits and lends locally, providing a more personalized banking experience.
If you choose a bank with a physical location, look for one in a convenient location. You don't want to have to travel a long distance to get cash in an emergency.
Check to see if the bank you're considering provides additional services such as credit cards, loans, and safe deposit boxes. Some banks also provide smartphone apps that can be beneficial.
Examine the fees for the accounts you want to open. Banks charge loan interest, monthly maintenance fees, overdraft fees, and wire transfer fees. Some large banks are aiming to eliminate overdraft fees by 2022, so that could be an important factor to consider.
How to Survive Without a Bank Account
Personal finances are typically easier with a bank account, but you may have your own reasons for not having one. It could be a one-time occurrence while you resolve identity theft issues or previous bank issues. Perhaps you've simply decided to avoid banks altogether. In either case, knowing how to function without a bank is critical if that is your preference.
Most day-to-day transactions and some bills can be handled with cash or prepaid debit cards, and some apps and other online services may be useful for other purposes. However, some challenges will be more difficult to overcome without a bank account than others.
Cards with Prepaid Debit
Prepaid cards allow you to do many of the same things that a debit card linked to a checking account allows you to do. Instead of a bank account, you load funds onto your card and spend the money you loaded. There are some important distinctions to be made between prepaid cards and bank accounts:
Prepaid cards do not have a minimum balance requirement to open or maintain, whereas many bank accounts do.
Prepaid cards, unlike credit cards, do not require a credit check. There is no borrowing because they are pre-paid.
ChexSystems and other similar services used by banks to conduct background checks on potential account holders will not prevent you from opening an account.
You cannot spend more money than you have on your prepaid card, incur debt, or incur overdraft fees as you would with a bank account. However, many credit cards charge fees if you try to make a purchase that exceeds your available balance.
Some prepaid cards have monthly maintenance fees and other fees, so read the fine print and make sure the card you select meets your needs. Monthly fees, ATM fees, reload fees, decline fees, bill-paying fees, and other charges are all common. 1 Depending on the consumer's needs, some cards offer different fee options.
Until society becomes cashless, the traditional currency will be available for day-to-day expenses. For things like food, gas, transportation, and entertainment, cash is usually an acceptable form of payment. The main disadvantage is that you must carry it with you, which can be dangerous, and there is no way to get it back if you lose it.
There's also the issue of how to get money in the first place. You can't use an ATM to withdraw money unless you have a bank account or a loaded prepaid card.
Note : Large bills may appear to be less bulky to carry, but many retailers and service providers will not accept anything larger than a $20 bill for most purchases. Instead, try to get small bills and buy bus or subway passes to reduce the amount of cash you need to carry.
Prepaid debit cards can assist you with the majority of your daily spending needs. There are a few places that refuse to accept plastic or charge a fee for using a card, but most merchants will accept payment with a prepaid card.
They'll never know if it's a prepaid card or a regular bank-issued debit card. You can spend as much money as you have loaded on the card, and if it is lost or stolen, you can cancel it and get a replacement. If you ever need cash, you can easily withdraw it from an ATM.
Bill Payment Without a Bank Account
Unfortunately, using cash is not always possible or convenient. Utilities (gas, water, and electric), phone companies, insurers, and subscription services typically require payment by check, credit card, or ACH transfer from your bank account. Some billers allow you to pay in person, but making the trip every month during business hours is inconvenient, and it's not practical if there is no local office.
If you intend to operate solely on cash, ask your billers where you can pay in person. Some provide local service centers, while others, such as Western Union agents, allow you to pay at national supermarkets and convenience stores. If you must mail a payment, make it payable to the biller rather than cash.
Prepaid cards, once again, can make things easier and less expensive. Many prepaid cards allow you to pay your bills online. If your biller accepts credit or debit card payments, simply provide the card number instead.
When you receive a check but do not have a bank account, your options for cashing it are limited. Your best bet may be to take the check to the bank of the check writer. For example, if the check is drawn on a Bank of America account, cash it at a Bank of America branch. Just be aware that if you are not an account holder, you may be charged a fee and the branch may refuse to cash the check.
Note : If you don't need cash right away or only need a small amount, a prepaid card can be useful. Most prepaid cards allow you to deposit money into your account by taking a picture with your phone. You should be able to withdraw those funds from an ATM within a few days. 4
Many retailers charge a fee to cash checks, but large retailers such as Walmart may waive the fee if you transfer the amount of the check to one of their prepaid store cards.
Retailers may also be willing to cash your checks. Check-cashing stores (often in the same location as payday loan shops) may also be an option, but they will most likely charge a higher fee. 6
Storing (and Saving) (and Saving)
Banks excel at keeping your money safe. Even if your bank burns down or is destroyed by a natural disaster, the FDIC should insure your funds. Credit unions are similarly safeguarded. 78 It's dangerous to walk around with large sums of cash or to keep all of your money in your home—it could be stolen or burned in a fire. If you intend to live without banks or prepaid cards, purchase a fireproof safe and locate a suitable location for installation.
Prepaid cards allow you to store money that you load into an account securely linked to your card. The account may or may not be FDIC-insured, but the money cannot simply disappear or go up in smoke.
Money Transfers and Receipts
If you want to pay friends and family (rather than businesses that send you bills), you have several nonbank options, but many of them require a bank account—or at the very least a prepaid debit card—to operate.
Note : Apps such as PayPal, Square, and Venmo are frequently free for person-to-person payments, but you must have a way to fund the payment. Most people will link their bank account to the online service, but prepaid cards are frequently accepted.
Bill-splitting apps are useful for splitting bills among friends or housemates, but they frequently require integration with P2P apps such as PayPal and Venmo.
Some services allow you to "load" money into an account by sending a money order, while others allow you to add funds to your account by purchasing cards at retailers. For example, the PayPal Cash Card can be loaded with cash at retailers such as Walmart.
Obtain a Loan
Bank accounts facilitate borrowing, but it is possible to obtain a loan without one.
When you apply for a loan, lenders frequently ask for your bank account information so that they can fund your loan and track where the money goes. Applying without that information is a stumbling block. Furthermore, even if you are approved, you must do something with the loan proceeds—either cash the check or deposit it in a prepaid account. All of this points to the fact that borrowing without a bank is more difficult.
When you are unbanked, your borrowing options are limited. You're likely left with less-competitive lenders such as payday loan stores and car title lenders. However, the fees for using those sources are notoriously high. Before you give up, go to your local credit union or small community bank and see if you can get a loan. Obtaining approval may require some effort, but it is not impossible.
At the very least, a bank is where you keep your money until you need it to pay bills or withdraw cash. It may also be the location where you obtain a loan to purchase a car or a mortgage to purchase a home. If you own a small business, it may be the place where you go to borrow money to expand or improve it.
Before selecting a bank, compare the various fees and charges associated with your accounts or any loans you may require. A little research and comparison will ensure you find the best fit for protecting your money, establishing credit, making payments, applying for loans, receiving funds, and saving money for future needs like retirement, emergencies, and homebuying.
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