beginner lesson • 10 min
What Banks Do
Learning objectives
By the end of this lesson, you should be able to:
- Explain the two core activities of a bank: accepting deposits and making loans. - Describe what a deposit is and why deposits matter to banks. - Identify common transaction, payment, lending, and digital-banking services. - Recognize that services and account features can vary from one bank to another.
Evidence & citations7 sources
A bank is a business that accepts deposits and makes loans. (supported)
Deposits are funds customers place with a bank that the bank is obligated to repay according to the account terms. (supported)
Deposits are a primary funding source for most banks and are used mainly to fund loans and investments. (supported)
Banks provide transaction services that can include checking accounts, cash withdrawals, bill payment, electronic transfers, and mobile or online account access. (supported)
The specific accounts and services available vary by bank and may include different combinations of deposit, payment, lending, and digital-banking services. (supported)
Banks in simple terms
Think of a bank as a financial hub. People and organizations place money there as deposits. The bank is obligated to repay those deposits according to the account terms. Banks also lend money to borrowers and help people move money, pay bills, withdraw cash, and use accounts online or through mobile devices.
Evidence & citations7 sources
A bank is a business that accepts deposits and makes loans. (supported)
Deposits are funds customers place with a bank that the bank is obligated to repay according to the account terms. (supported)
Banks provide transaction services that can include checking accounts, cash withdrawals, bill payment, electronic transfers, and mobile or online account access. (supported)
Bank lending can include consumer credit products such as mortgages, credit cards, and installment loans. (supported)
The main jobs of a bank
A bank is a business that accepts deposits and makes loans. Deposits are funds customers place with the bank, and the bank must repay them according to the relevant account terms. Deposits are a primary funding source for most banks and are used mainly to fund loans and investments.
Banks also provide services that help customers manage and move money. These can include checking accounts, cash withdrawals, bill payment, electronic transfers, and mobile or online account access. The exact combination of deposit, payment, lending, and digital-banking services depends on the bank.
Evidence & citations7 sources
A bank is a business that accepts deposits and makes loans. (supported)
Deposits are funds customers place with a bank that the bank is obligated to repay according to the account terms. (supported)
Deposits are a primary funding source for most banks and are used mainly to fund loans and investments. (supported)
Banks provide transaction services that can include checking accounts, cash withdrawals, bill payment, electronic transfers, and mobile or online account access. (supported)
The specific accounts and services available vary by bank and may include different combinations of deposit, payment, lending, and digital-banking services. (supported)
How deposits and loans connect
When a customer deposits money, the customer places funds with the bank under the account’s terms. The bank has an obligation to repay those funds according to those terms. For most banks, deposits are a primary source of funding, and banks mainly use that funding for loans and investments.
Bank lending can include consumer credit products such as mortgages, credit cards, and installment loans. This means a bank can serve both sides of a financial relationship: it can hold customers’ deposits and provide credit to borrowers. These are related activities, but a deposit account and a loan are different products with different purposes and terms.
Evidence & citations5 sources
Deposits are funds customers place with a bank that the bank is obligated to repay according to the account terms. (supported)
Deposits are a primary funding source for most banks and are used mainly to fund loans and investments. (supported)
Bank lending can include consumer credit products such as mortgages, credit cards, and installment loans. (supported)
How banking services work
Banking can involve several connected steps:
1. A customer places funds in a deposit account. 2. The bank records the deposit and is obligated to repay it according to the account terms. 3. The bank may use deposits mainly to fund loans and investments. 4. Customers use transaction services to make withdrawals, pay bills, transfer money, or access their accounts digitally. 5. For some electronic payments, banks participate in payment-processing networks. In an ACH payment, an originating depository institution sends payment instructions into the network, and a receiving depository institution receives the entry and posts it to the recipient’s account.
The available products and features depend on the particular bank.
Evidence & citations8 sources
Deposits are funds customers place with a bank that the bank is obligated to repay according to the account terms. (supported)
Deposits are a primary funding source for most banks and are used mainly to fund loans and investments. (supported)
Banks provide transaction services that can include checking accounts, cash withdrawals, bill payment, electronic transfers, and mobile or online account access. (supported)
Banks participate in electronic payment processing, including ACH payments between originating and receiving depository institutions. (supported)
The specific accounts and services available vary by bank and may include different combinations of deposit, payment, lending, and digital-banking services. (supported)
A simple day using a bank
Imagine a customer whose bank offers checking, online banking, and lending services. The customer receives money into a checking account, pays a bill online, withdraws cash, and sends an electronic payment. Separately, another customer may apply to that bank for a mortgage, credit card, or installment loan.
This example shows several roles a bank may play: holding deposits, supporting everyday transactions, participating in electronic payments, and providing credit. It does not mean every bank offers the same products or features.
Evidence & citations7 sources
Banks provide transaction services that can include checking accounts, cash withdrawals, bill payment, electronic transfers, and mobile or online account access. (supported)
Banks participate in electronic payment processing, including ACH payments between originating and receiving depository institutions. (supported)
Bank lending can include consumer credit products such as mortgages, credit cards, and installment loans. (supported)
The specific accounts and services available vary by bank and may include different combinations of deposit, payment, lending, and digital-banking services. (supported)
Key terms
- Bank
- ** A business that accepts deposits and makes loans.
- Deposit
- ** Funds a customer places with a bank that the bank is obligated to repay according to the account terms.
- Transaction services
- ** Services used to manage or move money, such as checking accounts, cash withdrawals, bill payment, electronic transfers, and online or mobile access.
- ACH
- ** An electronic payment network involving credit and debit transfers between depository institutions.
- Consumer credit
- ** Credit products for consumers, including mortgages, credit cards, and installment loans.
Evidence & citations9 sources
A bank is a business that accepts deposits and makes loans. (supported)
Deposits are funds customers place with a bank that the bank is obligated to repay according to the account terms. (supported)
Banks provide transaction services that can include checking accounts, cash withdrawals, bill payment, electronic transfers, and mobile or online account access. (supported)
Banks participate in electronic payment processing, including ACH payments between originating and receiving depository institutions. (supported)
Bank lending can include consumer credit products such as mortgages, credit cards, and installment loans. (supported)
Common misconceptions
**Misconception 1: A bank only stores money.** Banks accept deposits, but they also make loans, provide transaction services, and participate in electronic payment processing.
**Misconception 2: A deposit is the same as a gift to the bank.** A deposit is funds placed with a bank that the bank is obligated to repay according to the account terms.
**Misconception 3: Every bank offers identical services.** The specific accounts and services available can vary by bank, including the combinations of deposit, payment, lending, and digital-banking features.
**Misconception 4: All electronic payments work the same way.** Banks participate in different payment processes. ACH payments, for example, involve originating and receiving depository institutions and an electronic network.
Evidence & citations8 sources
A bank is a business that accepts deposits and makes loans. (supported)
Deposits are funds customers place with a bank that the bank is obligated to repay according to the account terms. (supported)
Banks provide transaction services that can include checking accounts, cash withdrawals, bill payment, electronic transfers, and mobile or online account access. (supported)
Banks participate in electronic payment processing, including ACH payments between originating and receiving depository institutions. (supported)
The specific accounts and services available vary by bank and may include different combinations of deposit, payment, lending, and digital-banking services. (supported)
Summary
Banks have two core activities: accepting deposits and making loans. Deposits are repayable funds placed with a bank under account terms, and they are a primary funding source for most banks. Banks may use that funding mainly for loans and investments.
Banks also help customers manage and move money through checking accounts, withdrawals, bill payment, electronic transfers, and online or mobile access. They may offer mortgages, credit cards, and installment loans, and they may participate in ACH payment processing. Because banks differ, the exact accounts and services available depend on the institution.
Evidence & citations11 sources
A bank is a business that accepts deposits and makes loans. (supported)
Deposits are funds customers place with a bank that the bank is obligated to repay according to the account terms. (supported)
Deposits are a primary funding source for most banks and are used mainly to fund loans and investments. (supported)
Banks provide transaction services that can include checking accounts, cash withdrawals, bill payment, electronic transfers, and mobile or online account access. (supported)
Banks participate in electronic payment processing, including ACH payments between originating and receiving depository institutions. (supported)
Bank lending can include consumer credit products such as mortgages, credit cards, and installment loans. (supported)
The specific accounts and services available vary by bank and may include different combinations of deposit, payment, lending, and digital-banking services. (supported)
Knowledge check
Test what you just learned.
Complete this short assessment for What Banks Do. You will get explanations immediately after grading.
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