While out running errands with my daughter last month, we stopped by the actual, physical bank to open a new account. After the customary lollipop from the teller at the end (Don’t worry, my kid got one too) my daughter asked if this is “the store that sells you money?”.
That definition is absolutely accurate but not at all precise in the modern world of banking.
By my count a “bank” is now one of the following:
And for some people….we can add Parents to the list as well.
The number and complexity of products in one of these banks is just too many to count but why has the model changed so much over the years?
What was a bank?
When an elementary school kid learns about banks, they likely hear the following: A bank is a business that takes in deposits from customers, pays them interest to keep their money there, then loans out the money to other customers to collect interest on the loan. The collected loan interest is higher than the paid deposit interest rate creating a profit spread for the bank.
This is known as Net Interest Income and it’s the main number any bank publishes when reporting earnings. This process serves the community by aggregating “buyers” (loan applicants) and “sellers” (depositors) of money into one place and facilitating the process for a fee and hopefully profit.
That’s it. That’s all a plain vanilla bank is supposed to do.
Precision Breakdown
Today, when we hear the word “bank”, many different things come to mind. The Federal Reserve, Goldman Sachs, the corner ATM, or maybe your mortgage provider. The word has become co-opted by modern complexity similar to the word “phone”.
The very, very short answer to why banks today are so much more than just a place to buy and sell money is because today there are no regulations to say otherwise. With nothing to stop them, bankers have pushed the boundaries of banking for decades in the name of innovation and risk mitigation. (but also profits. Mostly profits.)
Today assets earning interest for the bank can range from mortgages, to auto loans, to personal loans, or commercial real estate loans. Divisions for trading desks, market research, insurance and advisory are common too.
The biggest ones have more assets and market power than most countries or governments do. They employ 100,000s of people and every so often create one of these in the economy that needs to be cleaned up.
So, yes dear daughter, - a bank is where they sell you money but it’s so, so much more today.
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