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How Banks Make Money: Describe How Banking Adds Value To The Society

Referencing Styles : APA | Pages : 1

Banks are like other type of business, which deals with the product called money. The other businesses sell products or services, with the intension of making profit. In the same way, banks trade money in the form of loan, certificates of deposit and several other types of financial products. Interest on the loan is the pivotal way, through which banks make money. They generally impose higher interest rate, being paid by them on the account of depositors. The rate of interest, imposed by bank is entirely dependent on the number of people, wish to borrow and the available amount of money in the bank. The available amount of lending is also dependent on reserve requirement. It is worthy to mention here that the rate of funding also affects the available amount of lending. Funds rates are defined as that type of interest rate, being charged by the banks on their short term loans. This type of fund rate is being imposed by the bank with the intension of satisfying the reserve requirements. The banks generally trade money as the shortage of service. In addition to that, the convenient access to money and assurance of security are being provided by the banks to its customers.

Net interest margin is one of the most significant ways, through which banks money. The money, being deposited by the customers in their bank account is used by bank in the form of loan. The banks give loan to the lender at a cost, which is considered as interest rate. In the same way, banks collect money from the interest rate. A very small amount of interest rate is being given by the banks to its customers. The fundamental reason behind such activity is to satisfy the expectation of the customers to get return on investment in their savings account. Additionally, through which the banks give utmost value to its customers. Net interest margin is regarded as the difference in between the statistic of interest, being earned by banks from the deposits of customers and the interest, being paid by the banks to the customers.

Interchange is another vital way, through which the banks make money. Carrying out both debit and credit transaction is the major way, through which banks make money. The customers have to pay an interchange fee at the time when they use the debit cards and debit cards. A significant amount of money from the interchange fee goes directly to the consumer’s bank. However, a very lower amount of money goes to the merchant’s bank. Lack of control y the merchant bank over the interchange fee is the fundamental reason, for which this bank is acquiring very lower amount of interchange fee. Fees are one of the recent banking phenomena, which are acting as a major source of earning by the banks.  The banks also make money from the credit card late fee and multiple other types of penalties. During 2010, a law has been passed which covers the fact that it is imperative for the consumers to follow the overdraft coverage of credit card, which is very much needed in terms of avoiding unnecessary penalties.

There are three major ways, through which banks make money, which include charging interest on the loans, charging fees for financial services and selling the financial instruments in the external financial market. Thus, it is imperative for both the retail and commercial bank to attract wide range of customers, who are willing to deposit money in the savings account. This is the way, through which banks make enough money, which is required in order to stay in the business. A small amount of money, in the form of interest is being provided by the banks to the customers. This is the mode, through which the banks encourage the people to keep their money in the savings account. Majority of the banks lend to each other in a large scale. The time period of this lending usually lasts for merely three months. The bank also possesses the ability to lend the money in the interbank market if they have surplus of liquid asset. The inclusion of smooth flow of money makes it easy for the banks to both lend and borrow money from the interbank market as per the requirement.

Imposing higher interest rate on the customers than that of the depositors is another major way, through which banks earn huge range of money. The banks generally lend money to the customers in comparatively higher interest rate than that of the depositors. This difference is referred as the margin or turn, which is being kept by the bank as the form of their financial asset. The banks lend money in different form such as overdraft, mortgage, bank loan and credit card facility. The banks work very proficiently in order to ensure availability of fund among the customers, which is the key of strengthening the statistics of profit margin. Charging fee is another major way, through which the banks make money. Most of the retail and commercial banks impose fees on processing cheques and unauthorized transactions. It can be said that such fees act as a major source of money for the banks.   

Banks play a major role in strengthening the value to the society. Finance is one of the vital contributors to the good society. Baking is the major foundation of trust in the society, which play a critical role in economic up gradation. In the contemporary scenario, bank is regarded as the major way, through which prosperous market economy can be acquired. Finance is the crucial social institution, through which impending risk can be mitigated in an appropriate manner. In addition, proper banking is also a key factor in transforming the creative impulses in the society into vital products and service. At the same time, banking also supports in improving surgical protocol, modern manufacturing technology and scientific research enterprise and thus ensures implementation of public welfare system. Healthy connection in between the financial organizations and individual people is the key factor in promoting welfare of the society as it supports in funding for medical research, building new university and the construction of new city subway system. Finance provides with the comprehensive structure, through which entire city can be developed properly. Thus, it can be said that, successful integration of finance is a major factor in promoting our health and wellbeing.

Finance supports the society to accomplish its fundamental goals and objectives. With the assistance of appropriate banking system, structuring of effective economic arrangement can be initiated by integrating all the valuable resources. Payment for college education, comfortable retirement building of new hospital, implementation of social security system and opening new = restaurant are some of the major instances of social goal, which are being accomplished successfully by appropriate financial system. Finance is not only about making money. Rather, it can be considered as an effective functional science, which supports in accomplishing other goals of the society. Thus, it is evident that the financial institutions are closely aligned with that of the goals and objectives of the society.

Finance has the power to subvert the goal in case of any kind of issue in the financial infrastructure. Finance is considered as one of the most important and strongest forces in order to promote the wellbeing and thus expand the global population, which is very much needed for accomplishment of societal goals and objectives. Appropriate finance and banking system play a major role in promoting greater degree of prosperity.


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