Banks are businesses that hold, lend, and move your money

A bank is a licensed company that takes deposits from customers, lends that money to borrowers, and charges fees or interest to make a profit. When you put money into a checking or savings account, the bank holds it in a vault or electronic ledger, pays you a small amount of interest (or nothing), and uses your deposit to lend to other customers at a higher interest rate. The difference between what they pay you and what they charge borrowers is how banks make money.

Banks are regulated by federal and state governments to ensure they do not lose your deposits or engage in fraud. The Federal Deposit Insurance Corporation (FDIC) insures deposits up to $250,000 per account holder per bank, so if a bank fails, you get your money back from the government. This protection is why people trust banks with their paychecks and savings.

Banks also move money between accounts and between people. When you write a check, use a debit card, or set up a wire transfer, the bank processes that transaction and charges you a fee (or does not, depending on your account type). They also hold loans — mortgages, car loans, personal loans — and collect payments from borrowers over time.

Key Takeaways

  • Banks hold your deposits, lend money to others, and charge fees or interest to make profit.
  • The FDIC insures deposits up to $250,000 per account holder per bank if the bank fails.
  • Banks process transactions like checks, debit card purchases, and wire transfers, usually for a fee.
  • Different types of banks — commercial banks, credit unions, online banks — offer different services and fee structures.
  • Banks are required by law to report large deposits and suspicious activity to prevent money laundering and fraud.

Commercial banks versus credit unions and online banks

Commercial banks are the most common type. They are for-profit companies owned by shareholders, have physical branches in many locations, and offer checking accounts, savings accounts, loans, and credit cards. Examples include Bank of America, Wells Fargo, and Chase. They typically charge monthly fees for accounts, charge overdraft fees when you spend more than you have, and charge fees to use ATMs outside their network.

Credit unions are nonprofit organizations owned by their members. You must join to use one, usually by living in a certain area or working for a certain employer. Credit unions often charge lower fees, pay higher interest on savings, and charge lower interest on loans than commercial banks. The tradeoff is that they have fewer branches and ATMs, so they work best if you live near one or do most of your banking online.

Online banks have no physical branches — you manage your account through a website or app. They typically charge no monthly fees, pay higher interest on savings accounts, and charge no overdraft fees because they simply decline transactions that would overdraw your account. The tradeoff is that you cannot deposit cash or speak to someone in person. Online banks are often owned by larger financial companies or operate independently.

How banks make money from your account

Banks charge monthly maintenance fees on many checking and savings accounts, usually $10 to $15 per month. Some accounts waive this fee if you keep a minimum balance, set up direct deposit, or meet other conditions. Banks also charge overdraft fees when you spend more money than you have in your account — typically $25 to $35 per overdraft, and some banks charge multiple times per day if you make several transactions that overdraw you.

Banks charge ATM fees when you withdraw cash from an ATM that does not belong to your bank, usually $2 to $3 per withdrawal. They charge wire transfer fees when you send money to another bank, typically $15 to $30 depending on whether the transfer is domestic or international. They also charge insufficient funds fees when a check or automatic payment bounces because you do not have enough money.

On the other side, banks pay you interest on savings accounts and money market accounts, though the rate is usually very low — often less than 1 percent per year. High-yield savings accounts at online banks currently pay 4 to 5 percent, which is much higher. Banks do not pay interest on checking accounts in most cases, though some accounts offer a small rate if you meet conditions like setting up direct deposit.

What happens to your money when you deposit it

When you deposit money into a bank account, the bank does not set it aside in a separate vault with your name on it. Instead, the bank pools deposits from all customers and uses that money to make loans. Your deposit becomes a liability on the bank's balance sheet — the bank owes you that money — and the loans become assets that generate income.

The bank keeps only a small fraction of deposits on hand at any time, called the reserve requirement. The Federal Reserve sets this requirement, and it is currently zero percent, meaning banks do not have to hold any deposits in reserve. In practice, banks hold enough cash to cover daily withdrawals and keep the rest invested or lent out.

If many customers try to withdraw money at the same time — called a bank run — the bank may not have enough cash on hand and could fail. This is why the FDIC insures deposits: if a bank fails, the government pays depositors up to $250,000 per account. Bank runs are rare in the modern United States because of this insurance and because the Federal Reserve can lend money to banks in crisis.

How banks are regulated and insured

Banks are regulated by multiple government agencies. The Federal Reserve oversees large banks and sets interest rates that influence how much banks charge for loans and pay on savings. The Office of the Comptroller of the Currency (OCC) charters and regulates national banks. State banking regulators oversee state-chartered banks. The Consumer Financial Protection Bureau (CFPB) enforces rules about how banks treat customers and disclose fees.

The FDIC insures deposits at member banks up to $250,000 per depositor per bank. This means if you have $100,000 in a checking account and $100,000 in a savings account at the same bank, both are insured because they are different account types. If you have $200,000 in two checking accounts at the same bank, only $250,000 total is insured, so you would lose $150,000 if the bank failed. To protect more than $250,000, you can open accounts at different banks or use different account types.

Banks must also report large deposits and suspicious activity to the Financial Crimes Enforcement Network (FinCEN), a division of the Treasury Department. If you deposit more than $10,000 in cash, the bank files a Currency Transaction Report (CTR). If the bank suspects money laundering or fraud, it files a Suspicious Activity Report (SAR). These reports help law enforcement track criminal activity.

What to do if a bank makes an error or closes your account

If you notice an unauthorized transaction on your account — a charge you did not make — contact the bank immediately. Federal law gives you up to 60 days to report the error. The bank must investigate within 10 business days and either correct the error or explain why the transaction was correct. If the bank made a mistake, it must refund your money and pay you interest on the refunded amount if the investigation took more than 10 days.

If a bank closes your account without warning, it must give you notice and a reasonable time to withdraw your money. Banks can close accounts for many reasons: repeated overdrafts, suspected fraud, or simply because they no longer want your business. If the bank closes your account and you have money in it, the bank must return that money to you, usually by check or transfer to another account you provide.

If you have a dispute with a bank that you cannot resolve by speaking to a manager, you can file a complaint with the CFPB at consumerfinance.gov. The CFPB investigates complaints and can order banks to refund money or change their practices. You can also file a complaint with your state banking regulator or, for national banks, with the OCC.

How banks handle refunds and returned payments

When a business or government agency sends you a refund — a tax refund, an insurance refund, or a payment from an employer — they typically send it to your bank account via direct deposit or ACH transfer. ACH stands for Automated Clearing House, a system that moves money between banks electronically. The sending bank initiates the transfer, it passes through the ACH network, and your bank receives it and credits your account.

Direct deposits and ACH transfers usually take one to three business days. If you provide the wrong account number, the transfer may be rejected and returned to the sender. If you provide the right account number but the wrong routing number, the transfer may go to the wrong bank, and you will have to contact that bank to retrieve it.

Some refunds come by check instead of direct deposit. When you deposit a check, the bank puts a hold on the funds for one to five business days while it verifies the check is real and the sending bank has the money. During the hold period, the money is in your account but you cannot withdraw it. Once the hold lifts, the money is yours to spend.

Frequently Asked Questions

What is the difference between a bank and a credit union?

Credit unions are nonprofit organizations owned by members, while banks are for-profit companies owned by shareholders. Credit unions typically charge lower fees and pay higher interest on savings, but have fewer branches and ATMs. Both are insured by the FDIC or a similar agency, so your deposits are protected either way.

Is my money safe if I have more than $250,000 at one bank?

Only $250,000 per account type is insured by the FDIC. If you have $300,000 in a checking account, only $250,000 is protected. To protect more money, open accounts at different banks or use different account types like checking, savings, and money market accounts at the same bank, each insured separately.

Why did my bank close my account?

Banks can close accounts for repeated overdrafts, suspected fraud, or because they no longer want your business. The bank must notify you and give you time to withdraw your money. If you believe the closure was unfair, you can file a complaint with the CFPB or your state banking regulator.

How long does a direct deposit take?

Direct deposits and ACH transfers usually take one to three business days. Some employers or government agencies offer next-day deposits, but this depends on the sender, not the bank. If a deposit does not arrive within three business days, contact the sender to verify they have the correct account and routing number.

What happens if I deposit a check and the account it came from does not have enough money?

The check will bounce, and your bank will reverse the deposit and charge you a returned check fee, usually $10 to $25. The bank that issued the check will also charge the person who wrote it a fee. If you already spent the money, you will owe your bank the amount of the check plus the fee.