How does a Retail bank function

How does a Retail bank function, and why do you trust your money with the bank

Which word strikes the very first moment when we say MONEY? BANK, for sure. Whether its your salary or its you shopping bank is involved. And have we ever thought how does bank actually work?  Can you guess? NO, it’s not the money, it’s something which we need to have with the bank and bank needs to have in us. Can’t guess it? It’s TRUST!!! Yeah, every bank in the world works on the base of a strong trust which the customers hold in with the bank company and the bank holds in the customers.

Just to make you believe TRUST is the critical part let’s take an example. You get your salary in hard cash in your hand; you take it home and keep it in a safe. But you always fear theft. So to keep it safe we give it to the Bank to store it and keep it secured.

HOW COULD YOU JUST GIVE OUT YOUR ENTIRE SALARY TO A BANK, TO A BANKER TO KEEP IT WHEN YOU DON’T EVEN KNOW HIM? TRUST! This is trust you have in the bank that your money won’t go away and the bank will take care of it. And so does every person on earth have trust in bank and so they just deposit their money in the bank.

DEFINITION: A bank is an institution that deals with the money storage and security and provides financial help to customers.

Economy won’t flourish if the banks aren’t working well. Without a bank an economy gets paralysed. When a person deposits the money in a bank, it’s deposited in the Bank’s store and is now a property of Bank. But yeah the bank entitles you to get the complete money back which you had deposited with the bank.

How does Bank earn money and lend to people?

You would be amused to know that it is your balance that you have submitted to bank that the bank lends to other people. But if you go asking for your money, they cannot deny giving it to you. They keep a summary of your deposits so that when you come to withdraw money you can get it. What actually happens is that on a day there are way many withdrawals and deposits in banks. When you deposit the money in the bank, the bank in return entitles you to have your money back when you come asking for it. Now the money you deposit becomes the property of the bank and can give it to anyone who withdraws or takes loan. So in short, the money or cash or note, (the substance) that you deposited keeps on rotating within people, but the amount of money (the figures) you have with the bank is kept recorded.

This money is lent to those who are in need and in return they pay interest at every fixed period of time. And after the specified period, the borrower has to pay the entire Principal amount that he borrowed back to the bank. So the Interest earned is the earning of the bank. These interest earned money from many other customers become so huge in figures that it can be lent to the next borrower.

Today, with the developing technological word, the use of hard cash has decreased and what has been trending is Plastic Money – Credit Card, Debit card etc. The use of cash is tiresome and somewhat time taking if it is a huge amount. Also people are scared of pickpockets. This has reduced the complexity of such things to a real high extent. Whether it’s a huge amount or a small, just swipe, enter your PIN and DONE! Payment Made.

So how does this work actually when you aren’t exchanging money for the good you buy?

Let’s deal this with an example. Suppose you bought some clothes from a shop whose bill broke up for an amount of Rs. 5000. The shop has an account with a bank where all the money gets deposited. So when, you swipe your card and enter your pin, the specified amount that you had shopped for is deducted from your account. As soon you enter Pin on the swiping machine, the bank is automatically directed by you to deduct that amount from your account and transfer it to the account linked with the swiping machine. This makes it hassle free for both the customer and the shop owner and to carry huge amount of cash.

Though the world is evolving day by day to more of a tech world, but the working of the essential part of an economy completely depends on the TRUST of the customers. If the customers stop trusting all at once, the bank is sure face bankruptcy.

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