A ActivaCIossroom Nkange Berry-Owens (Sterling High School} 3F. How Banks Work When you think about banks, the first thing that probably comes to mind is money locked in a safe. The primary tunction of banks is to be a depositOry for people's money; so, how do banks make money? As long as we are talking about money, it is about time we addressed the concept of interest. Interest is the cost of using semeone else's money. If you have ever borrowed money from someone, then you may have given that persOn an IOU with a promise to pay on a later date. In the world of banking, it is pretty much the same thing. When you borrow money from a bank, you will sign a contract to repay the bank. The amount you borrow is called the principal. The interest is the extra amount added into each payment. This is called the annual percentage rate (APR). For instance, if you borrow $100,000 at 10 percent interest, then you will owe the servicer ot the loan $10,000 at the end of the first year. That comes to almost $840 per month to pay the interest alone. The business model of banking is simple. Consider graphic 3.8. A depositor puts part of her disposable inc0me into a bank. By giving up the utility that the deposited money could give her at that moment, she receives interest (extra money added onto her principal}. The bank loans most of the deposit to a borrower. That person then pays interest on his loan. The bank uses that revenue 9'93\"\" 3-3 to pay the depositor's interest. It is simple. People will pay banks to use their money, and a bank will pay you to deposit y0urs. Banks must follow many government regulations that help discern who should qualify tor a loan and who should not. Banking is perhaps the most regulated business in the United States. The government has been setting regulations in the industry since the 19305, when Congress established the Federal Deposit Insurance CorporatIOn (FDIC). During the Great Depression, thousands of banks closed. Many Americans lost their life savings and refused to trust banks again. To remedy this, the FDIC started guaranteeing all deposits. Today, the amount insured is $250,000. Next time you see a commercial on TV for a bank, listen closely for the \"FDIC insured" at the end. Peeple need money for a variety of reasonscollege loans, business loans, auto loans, and purchasing a home to name a few. A person who needs to borrow or save money has several options in today's marketplace. Banks ceme in a few basic categories depending on who is in charge of supervising and regulating them. Sorne banks are regulated by the state they are located in while most others are under the jurisdiction of the federal government. Good consumers will choose a bank the same way they choose a car or a lawyer. They shop around. 0 Commercial banks are the mast numerous and protable. Banks profit by charging fees and lending money at an interest rate that is higher than the rate it pays depositors. Bank of America, Chase Bank, and Citibank are counted in this category. Nowadays, more and mom banks rely on fees to pad their profits. 0 Credit unions are commonly associated with unions, charities, churches, and other social Organizations. Members deposit their money to buy shares (that is, ownership in the credit A ActivaClassroom Nkange Barry-Owens [Sterling High School} union). These shares pay an annual rate of interest. The credit union uses these deposits to make loans to other members, typically at lower rates than commercial banks. Unlike other depository institutions, credit unions are nonprofit, so they are not taxed on their income. 0 Federal savings banks: These are organized under the federal Home Owners' Loan Act. They primarily serve as mortgage lenders (they loan money to buy land or property). They often have the word \"savings bank" or \"savings and loan" in the name of the company. Often, they are not members of the Federal Reserve System. a Internet banks: Rapidly, the internet is disrupting many industries. Banking is no exception. Some banks do not have branches. Rather, they are accessible only on the lnternet. Depositors can use bank machines, but most business is done on the web. They are often insured by the FDIC, but be sure to check. Regardless of what you need from a bank or credit union, they all function in the same way: they take deposits and give out loans. When choosing a bank or credit union, pay attention to what fees they charge and when. If you are careful with your money, you can avoid most charges, but if you make a few mistakes, it could cost you hundreds of dollars. Banks and credit unions are finding many new ways to provide people with easier access to their money. It makes their business activity more profitable while making banking more convenient. Most people now carry a debit card, for example. Debit cards may look like credit cards but take money directly from one's checking account. it you are not careful, you can make purchases while still waiting for a check that you wrote to clear. The wise consumer always keeps receipts and keeps close track of spending. Two last developments in banking today are electronic in nature. ATMs (around for decades) and the Internet give people constant access to their money. These tools make things like demand deposits even more liquid. Banks and Credit unions save millions of dollars when customers use electronic means of doing business rather than going to a teller. With electronic bill paying, debit cards, ATM cards, and direct deposit of paychecks, technology-savvy customers need never visit an actual branch. Many banks and credit unions will even accept a deposit by simply taking a photograph of the check through a smartphone app . The Pressing