Next event in:

  • 00 DAYS
  • 00 HR
  • 00 MIN
  • 00 SEC

How Banks Work

How Banks Work

Categories: Finance,Sponsored

Banks can seem mysterious and confusing, but it doesn’t have to be that way. Our friends at bunq — a mobile high tech bank that lets you easily open an account and has a unique view on investing money (or not) – gave us the scoop on how banks work.

They also helped us understand why banks are useful, and what to pay attention to when setting up an account. Plus, they gave us a taste of the future of banking. Read on to learn more.

What happens to your money?

Have you ever wondered what happens after you deposit your money?

“Banks make money by using your money for mortgages, loans, investments etc.,” explains a bunq representative.

The way it usually works is that they use your deposit to fund loans. Loans are what allow individuals to buy a home, a car, or anything else that they can’t afford. Banks make a profit on that by charging the borrower what is known as interest.

Normally, banks will also pay you interest, as a ‘thank you’ for lending your money to others, but the rate you get is much smaller than the interest rate the bank receives.

Second, banks invest your money in projects such as real estate, enterprises, governmental bonds, repurchase agreements, etc.

There are however, alternatives to this. For example,  bunq won’t invest your money at all. This avoids a “run on the bank”. A run on the banks occurs when a shock to the financial system prompts a large amount of people to retrieve their money. Seeing as most banks don’t hold all their depositors cash on hand, run on the banks can lead to catastrophic financial collapse (which has happened in the past several times).

Why do we need banks?

Most simply put, banks are very useful because they provide us with a safe place to store our money.

Imagine having to hide your life savings under your bed on in a jar on the shelf. You’d always have to worry about being robbed. Or, say you want to buy a car and think you’d have to carry a bag full of cash to pay for it.

That’s why it’s a good thing to have your money put away safely in a bank.

Moreover, you can’t contribute to today’s increasingly digital society without a bank account. “No employer will pay your salary in cash. And your utility company probably won’t accept money for your energy bill if you showed up at their reception,” says our representative at bunq.

Credit and debit cards

Since the introduction of debit and credit cards, we’ve been able to replace wads of cash with a thin, slick, plastic card.

The primary difference between these two types of cards is that with a debit card, you are limited to your actual funds, whereas with a credit card, you are able to spend more than you have in your account. In the Netherlands, the former is much more popular than the latter. You’ll quickly find that credit cards are not as widely accepted here as they maybe in your home country.

What to watch for when choosing a bank?

With a large number of banks available, both in the Netherlands and worldwide, it may feel difficult to find the “right” one. Choosing a bank is personal, and may depend on what type of account(s) you need, your intended use of the bank, and your spending behavior.

How easy is it to set up an account?

One of the things you have to look for in a bank is how easy it is to open an account. But maybe instead of going to a physical branch of your bank, you prefer to get it all done using your mobile phone?

For some, another important consideration may be how easy and quick it is to open a joint account – one or even many. Modern banks such as bunq nowadays offer these options to their customers.

What are the rates and fees?

When choosing a bank, make sure there are no hidden fees. For example, banks make a profit from overdraft fees. Meaning, if you overdraw your account due to a lack of funds, most banks automatically pay the difference and then charge you a fee for this service.

Other fees, most often charged by banks, include: general fees (to maintain your account) and ATM fees. Some banks also charge for using your card in other currencies. Interestingly enough bunq doesn’t charge these fees at all. This is in line with their motto “Bank of the free” where “you’re money stays your money”.

Also if you’re an avid traveler or if you send money abroad on a regular basis, consider a bank which charges minimal fees for such activities.  Our representative at bunq indicated that they’re users can send money abroad for 8 times cheaper (thanks to their partnership with Transferwise) than traditional banks and also charge no foreign exchange fee for doing so.

What is the quality of the customer service and community?

Last but not least, you want to make sure that the bank provides some form of customer service, either by phone, email, or chat.

Some banks also offer the option of  a forum where clients can ask questions, and share experiences, and employees can also jump in to address any concerns should they arise. A good example of this is the together.bunq.com.

It’s also helpful if a bank offers service in multiple languages. Our representative at bunq highlighted the fact that they offer service and support in

What’s next for banks?

Banks are rapidly changing. For example, fintech firms and big tech organizations are now providing services traditionally reserved for banks, such as payments, as well as checking and savings accounts.

Customers are requiring more personalized services, the ability to see their transactions in real-time, and the possibility to pay and receive money on-the-go – where and when they need it – which is radically disrupting the banking industry.

But banks are changing in yet another way. “Forced by PSD2 (Revised Directive on Payment Services), banks will have to open up and give more influence and control to the user,” explains our bunq representative.

Excitingly, bunq offers all these features, and then some! Check them out at bunq.com to see how they’re revolutionizing banking.