What banks do: deposits, loans, and payments
Banks provide three main services: they hold your money in deposit accounts, they lend money to people and businesses, and they move money between accounts and people. These three functions are how banks make their income and how they serve customers. Understanding what each one does helps you see why banks charge certain fees, why they ask for certain information, and what happens when something goes wrong with your account.
The three services overlap and support each other. A bank uses deposits from one customer to fund loans to another. Payments move money that came from deposits or loan proceeds. Each service has its own rules, timelines, and protections under federal law.
Key Takeaways
- Deposit accounts let you store money safely and earn interest, and the FDIC insures most deposits up to $250,000 per account type per bank.
- Loans let you borrow money for a car, house, or business, and you repay the loan plus interest over a set schedule.
- Payment services move money between accounts through checks, wire transfers, ACH transfers, and debit cards.
- Banks make money from the difference between what they pay you on deposits and what they charge you on loans, plus fees for payment services.
Deposit accounts: where your money sits and grows
A deposit account is a contract between you and the bank. You give the bank your money, and the bank agrees to hold it, keep it safe, and return it when you ask. In exchange, the bank may pay you interest on the balance, and the bank gets to use your money to make loans to other customers.
Deposit accounts come in several types. A checking account is designed for frequent withdrawals and payments — you write checks, use a debit card, or set up automatic transfers. A savings account typically earns interest but limits how many times per month you can withdraw. A money market account is a hybrid that earns higher interest than savings but requires a larger opening balance. A certificate of deposit (CD) locks your money away for a fixed term — three months, one year, five years — and pays a set interest rate; you pay a penalty if you withdraw early.
The Federal Deposit Insurance Corporation (FDIC) insures deposits at most banks up to $250,000 per depositor per bank per account type. This means if the bank fails, the FDIC will return your money up to that limit. Credit unions use a similar system called the National Credit Union Administration (NCUA). This insurance does not cover investment accounts or money you lend to the bank in other ways.
Loans: borrowing money and paying it back with interest
A loan is money the bank lends you, which you agree to repay over time with interest. The interest is the bank's profit on the loan. The bank charges interest because it is giving up the chance to use that money elsewhere, and because some borrowers will not repay.
Common types of loans include a mortgage (for buying a house), an auto loan (for buying a car), a personal loan (for any purpose, usually unsecured), a home equity loan (borrowing against the value of a house you own), and a business loan (for a company). Each type has different terms, interest rates, and requirements. A mortgage might run 15 or 30 years; an auto loan typically runs 3 to 7 years; a personal loan might run 2 to 5 years.
Before lending, banks check your credit score, income, employment history, and existing debts. They use this information to decide whether to lend and at what interest rate. A higher credit score usually means a lower interest rate. If you default on a loan, the bank can seize collateral (like a car or house) or take legal action to recover the money.
Payment services: moving money between accounts
Banks move money on your behalf through several methods. A check is a written order to the bank to pay someone from your account; the bank clears the check through a clearing house and deducts the amount from your balance. A debit card lets you spend money directly from your checking account at a merchant or ATM. An ACH transfer (Automated Clearing House) moves money electronically between bank accounts, usually within one to three business days. A wire transfer moves money the same day or next day but costs more and cannot be reversed.
Banks charge fees for some payment services. A wire transfer might cost $15 to $50. An overdraft — spending more than your balance — can trigger a fee of $25 to $35 per transaction. Bounced checks (checks that fail because of insufficient funds) also carry fees. Some banks offer free checking and do not charge for basic ACH transfers or debit card use.
Payment services are also where fraud and error happen most often. If someone uses your debit card without permission, federal law limits your liability to $50 if you report it within two business days, and to $500 if you report it later. If a merchant charges you twice by mistake, you can dispute the charge with the bank, and the bank has a process to investigate and refund you.
How banks make money from these three services
Banks profit from the spread — the difference between what they pay depositors in interest and what they charge borrowers. If a bank pays 0.5% interest on savings accounts but charges 5% on personal loans, the spread is 4.5%. Banks also make money from fees: overdraft fees, wire transfer fees, monthly account maintenance fees, and ATM fees if you use another bank's machine.
Loans are the largest source of bank profit because interest rates on loans are much higher than rates paid on deposits. A mortgage at 6% generates far more income than a savings account at 0.5%. Banks manage risk by diversifying — lending to many borrowers so that losses from a few defaults do not wipe out profits from many successful loans.
What happens when something goes wrong
If you discover an error on your account — a deposit that did not post, a charge you did not make, a transfer that went to the wrong person — contact the bank immediately. For deposit errors, the bank must investigate within 10 business days and refund you if the error is confirmed. For payment disputes, the timeline depends on the type of payment, but banks typically have 30 to 60 days to investigate.
If the bank makes an error on a loan — charging the wrong interest rate, applying a payment to the wrong account, or failing to credit a payment — you can file a complaint with the bank's customer service department and escalate to the bank's compliance office. If the bank does not resolve it, you can file a complaint with the Consumer Financial Protection Bureau (CFPB), which oversees bank practices.
Frequently Asked Questions
What is the difference between a bank and a credit union?
Both hold deposits and make loans, but banks are for-profit businesses owned by shareholders, while credit unions are member-owned nonprofits. Credit unions often charge lower fees and pay higher interest on savings, but they may have fewer branches and ATMs. Both are insured by the government — banks by the FDIC and credit unions by the NCUA.
Can a bank refuse to open an account for me?
Yes. Banks can refuse service for any reason that is not discriminatory. Common reasons include a history of fraud, unpaid overdrafts at other banks, or a ChexSystems report (a record of banking problems). You can request a copy of your ChexSystems report and dispute errors on it.
What happens to my deposits if the bank fails?
The FDIC takes over the bank and pays depositors up to $250,000 per account type. If you have $300,000 in a checking account at a failed bank, the FDIC will return $250,000. Money in savings accounts, CDs, and money market accounts are insured separately, so you could have $250,000 in each and recover all of it.
Why do banks charge overdraft fees if I only go over by a dollar?
Banks treat each overdraft as a separate transaction, so a $1 overdraft and a $100 overdraft both trigger the same fee. Some banks allow a small grace period or waive one overdraft per year. You can ask your bank about overdraft protection, which links your checking account to a savings account or credit line to cover shortfalls automatically.
Can I get my money back if I wire it to the wrong person?
Wire transfers cannot be reversed once sent. If you wire money to the wrong account, you must contact the receiving bank and ask them to return it — they are not required to do so. This is why wire transfers are used for large, trusted transactions. For smaller payments or when you are unsure of the recipient, ACH transfers are safer because they can be disputed.