A bank is a business that holds your money, lends it out, and charges fees for both

A bank takes deposits from customers, keeps some of that money in a vault or reserve, and lends the rest to other customers and businesses. When you deposit $1,000, the bank doesn't set it aside in a box with your name on it. Instead, it uses your money to make loans—mortgages, car loans, credit cards—and keeps the interest those borrowers pay. You earn a small amount of interest on your deposit (often close to zero), the bank keeps the larger amount, and that spread is how banks make profit. The bank also charges you fees: monthly account maintenance, overdraft fees, ATM fees, wire transfer fees. Those fees are another revenue stream.

Banks are regulated by federal and state governments precisely because they hold so much of the public's money. The Federal Deposit Insurance Corporation (FDIC) insures deposits up to $250,000 per account holder per bank, so if the bank fails, you don't lose your money—the FDIC pays you back. This insurance exists because banks do fail sometimes, and without it, a bank failure would wipe out ordinary people's savings.

Not all financial institutions are banks. Credit unions are member-owned cooperatives that work similarly but are run as nonprofits. Savings and loan associations focus on mortgages. Online-only banks have no physical branches but offer the same deposit and lending services. Money market accounts, brokerage firms, and payment apps like Venmo or PayPal are not banks—they don't hold deposits the same way or have FDIC insurance the same way, though some partner with banks behind the scenes.

Key Takeaways

  • A bank profits by paying you low interest on deposits and charging high interest on loans, then keeping the difference.
  • The FDIC insures your deposits up to $250,000 per account at each bank, so a bank failure does not erase your savings.
  • Banks charge fees for monthly maintenance, overdrafts, ATM use, and wire transfers—these are separate from interest and add up over time.
  • Credit unions and online banks operate under different rules and ownership structures but serve the same basic function as traditional banks.
  • Not every financial company that holds money is a bank; payment apps and brokerages have different insurance and regulation.

How a bank makes money from your account

When you deposit money into a checking or savings account, the bank immediately owns that money legally. You own the right to withdraw it, but the bank controls it. The bank then lends that money out at a higher interest rate than it pays you. If the bank pays you 0.01% annual interest on a savings account and lends that same money to a mortgage borrower at 6.5%, the bank pockets the 6.49% difference. Multiply that across millions of accounts and billions of dollars, and the spread becomes enormous profit.

Fees are the second revenue stream. A monthly maintenance fee might be $10 to $15. An overdraft fee—charged when you spend more than you have—can be $25 to $35 per transaction. An out-of-network ATM fee is typically $2 to $3. A wire transfer fee is often $15 to $25. A returned check or failed payment might cost $25 to $40. None of these fees are required by law; banks set them. Some banks waive them if you maintain a minimum balance or set up direct deposit. Others charge them to everyone. The fees are negotiable, and switching banks is one way to reduce them.

What FDIC insurance actually covers

The FDIC insures deposits, not investments. If you have $250,000 in a savings account and the bank fails, the FDIC pays you the full $250,000. If you have $300,000, the FDIC covers $250,000 and you lose $50,000. The insurance limit applies per depositor per bank, so if you have accounts at two different banks, each account is insured separately up to $250,000.

FDIC insurance does not cover stocks, bonds, mutual funds, or money market funds held at the bank. It does not cover safe deposit boxes or their contents. It does not cover cashier's checks or money orders issued by the bank (those are the bank's liability, not your deposit). If you have a joint account with another person, each person's share is insured separately up to $250,000, so a joint account can be insured up to $500,000 total. Retirement accounts (IRAs, 401(k)s) held at a bank are insured separately from regular accounts, also up to $250,000 each.

FDIC insurance is automatic—you don't pay for it or sign up for it. Every deposit account at a bank insured by the FDIC is covered. You can check whether a bank is FDIC-insured by searching the FDIC's Bank Find tool on their website or asking the bank directly.

The difference between banks, credit unions, and online banks

A traditional bank is a for-profit corporation owned by shareholders. A credit union is a nonprofit cooperative owned by its members—the people who have accounts there. Credit unions typically offer lower fees and higher interest rates on savings because they return profits to members instead of paying shareholders. However, credit unions are smaller and have fewer branches and ATMs than large banks. Credit unions are insured by the National Credit Union Administration (NCUA), not the FDIC, but the coverage is the same: $250,000 per member per institution.

Online banks have no physical branches—you manage your account entirely through a website or app. They have lower overhead costs than brick-and-mortar banks, so they often offer higher interest rates on savings and lower or no fees. The tradeoff is that you cannot walk into a branch to deposit cash or speak to someone in person. Most online banks are FDIC-insured and work the same way as traditional banks behind the scenes; some are actually subsidiaries of larger traditional banks.

Savings and loan associations (also called thrifts) historically focused on mortgages and savings accounts. Many have merged with or been acquired by larger banks, but some still operate independently. They are regulated differently than banks but offer similar services and FDIC insurance.

What happens when you write a check or use a debit card

When you write a check, you are instructing your bank to transfer money from your account to the recipient's bank. The check itself is not money—it is a written order. The recipient deposits or cashes the check at their bank, which then contacts your bank and requests the funds. Your bank verifies you have enough money, deducts it from your account, and sends it to the recipient's bank. This process typically takes one to three business days, which is why checks are not instant. If you write a check for more money than you have, your bank may refuse to pay it (a "bounced" check) or pay it anyway and charge you an overdraft fee.

A debit card is faster. When you swipe or insert a debit card, the transaction is processed almost immediately through the card network (Visa, Mastercard, etc.). The merchant's bank contacts your bank, your bank verifies the funds, and the money moves within hours or a day. Debit transactions are also reversible if there is fraud or an error, though the process takes longer than a credit card dispute.

How banks handle deposits and withdrawals

A deposit is money you put into your account. You can deposit cash at a branch, through an ATM, or by mobile check deposit (photographing a check with your phone). Cash deposits are usually available immediately. Check deposits typically take one to three business days to clear, meaning the bank verifies the check is real and the funds are actually there before crediting your account. During that time, the money is "pending" and you may not be able to withdraw it.

A withdrawal is money you take out. You can withdraw cash at an ATM, a branch, or by writing a check. ATM withdrawals are instant if the ATM belongs to your bank; out-of-network ATM withdrawals may take a day and will incur a fee. Withdrawals from a branch are instant. Checks take one to three days to clear on the recipient's end, but the money leaves your account immediately when you write the check.

Banks set daily withdrawal limits on savings accounts (often $6 per month, though this rule has loosened in recent years) and daily ATM withdrawal limits (often $500 to $1,000). These limits exist to prevent fraud and manage cash flow. You can request a higher limit or make a withdrawal at a branch to bypass the ATM limit.

Why banks ask for personal information and how they use it

Banks collect your name, address, Social Security number, employment information, and income to verify your identity and assess risk. The Social Security number is used to check your credit history and report your account activity to credit bureaus. Banks are required by federal law (the Bank Secrecy Act and Know Your Customer rules) to verify who you are before opening an account, so they can prevent money laundering and fraud.

Banks also use your information to market products to you—credit cards, loans, investment services—and to sell anonymized data to third parties. Your account activity is not sold, but aggregated data about customer behavior is valuable to marketers and researchers. You can opt out of some marketing by contacting the bank, but you cannot opt out of the legal identity verification.

Frequently Asked Questions

What happens to my money if the bank goes out of business?

The FDIC takes over the bank and pays you back up to $250,000 per account. If you have more than $250,000, you lose the amount over the limit. This has happened fewer than 600 times since the FDIC was created in 1933, and no depositor has lost FDIC-insured funds since then.

Can a bank refuse to give me my money?

A bank can freeze your account if it suspects fraud or illegal activity, but only temporarily while it investigates. If you have a legitimate dispute with the bank, you can file a complaint with your state banking regulator or the Consumer Financial Protection Bureau. The bank cannot simply keep your money without cause.

Why do some banks charge fees and others don't?

Banks set their own fees based on their business model. Online banks often have no fees because they have lower costs. Traditional banks with many branches charge more because they have higher overhead. Some banks waive fees if you maintain a minimum balance or set up direct deposit. Shopping around for a bank with lower fees can save hundreds of dollars per year.

Is my money safer at a big bank or a small bank?

Safety depends on FDIC insurance, not bank size. Both large and small FDIC-insured banks are equally safe up to $250,000. A small bank that is not FDIC-insured is riskier than a large FDIC-insured bank. Always verify FDIC insurance before opening an account.

What's the difference between a savings account and a checking account?

A checking account is designed for frequent transactions—you can write checks, use a debit card, and make unlimited withdrawals. A savings account is designed to hold money and earn interest; it has withdrawal limits and fewer transaction features. Banks often charge lower fees on savings accounts and pay higher interest rates.