Understand the bank to better invest
the bank

Understand the bank to better invest

What should one know about banking and banking services? In fact, understanding banking is not easy. Tit is the idea that I will develop in this article. In fact, it is opportune for you to educate yourself in order to better invest your money.

Here's what you need to know first. The fight against poverty is essentially through financial inclusion. Fortunately, many people these days have understood this. This is why banks on a daily basis welcome more and more customers who request services in order to include themselves financially.

What is a bank?

The banks are financial intermediaries. They have a crucial role to play in financing the economy. Banks connect people who have excess financing with those who need financing. They perform a multitude of functions including deposits, withdrawals, currency exchange, currency trading and wealth management. In short, they act as a link between depositors and borrowers. They use funds deposited by their customers to provide credit facilities to people who wish to borrow.

the bank

How does a bank work?

To understand this paragraph, I would first like to ask you some questions. Have you ever wondered:

  • What does my bank do with my deposit?
  • Does it go in a safe somewhere?
  • Will I ever get this money back?

The answer to these questions is simple. Here's what you need to know first.

➤ How does a bank make money?

When a person deposits money into their bank account, the bank can then lend that money to other people. This is called financial intermediation. The depositing customer earns a small amount of money in return (interest on deposits). The lending customer pays a larger amount of money to the bank in return (interest on loans). To earn money for itself, the bank keeps the difference. I often joke that this traditional way of making money is the 3-6-3 rule.

That is, the bank borrows money at 3% (low rates), lends it at 6% (high rates) and pocketing the difference (3%).

➤ What are the bank's products and services?

Keeping large amounts of money at home can be risky. Even if the chances are low, there is always a risk of loss, theft or even natural disaster. When you deposit money in an insured bank, it is protected up to the authorized limits. Besides this offer that the bank offers, There are other products and services that the bank offers. Here they are.

✔️ Current accounts

A checking account is a service provided by most banks that allows individuals and businesses. The terms and conditions of a checking account can vary from bank to bank. Typically, a checking account holder can use personal or business checks in place of cash to pay debts. Most checking accounts allow customers to withdraw their money at theusing an ATM.

✔️ Savings accounts

A savings account can help you separate the money you want to save from the money you need to spend. For many, it’s an easier way to achieve a goal, like saving for home improvements or building an emergency fund. Most savings accounts can automatically transfer money from your checking account to your savings account each month, so you don’t even have to think about doing it yourself.

An added bonus is that banks usually pay you interest on these savings accounts. This is "free" money which can help you reach your financial goals a little faster.

✔️ Money market accounts

A money market account is a type of savings account which often pays higher interest rates than a traditional savings account. The more you save, the more you can earn. But keep in mind that the number of withdrawals per month is limited due to federal laws.

✔️ Certificates of deposit

A certificate of deposit is a type of bank account where you agree to keep your money in the account for a certain amount of time, from 6 months to 5 years. The longer you save, the higher the return. You can always decide to withdraw your money early. However, there is a penalty for withdrawing before the end of your certificate of deposit term.

✔️ Individual retirement accounts

These are long-term retirement investment accounts. The earnings in these accounts grow tax-deferred. You cannot access the funds until you reach retirement age without incurring penalties and tax consequences.

✔️ Debit cards

A debit card or check card is similar to a credit card. It offers an alternative payment method to cash when making purchases. With a debit card, you can pay for everyday expenses with a simple swipe (and usually your PIN).

✔️ Credit cards

A credit card lets you pay for items with a line of credit. Essentially, you borrow money and then pay it back when the bill comes. But remember, different credit cards charge different interest rates, so it's important to know what you're agreeing to (so as not to pay too much in the long run).

✔️ Other banking services

Most financial institutions offer much more than just savings and checking accounts. They can provide a variety of lending tools such as personal loans, student loans, auto loans, credit cards, and mortgages. So, always ask yourself: Is it a Islamic bank or conventional bank?

How does the bank offer its products and services?

To offer its services and products, the bank has several methods to do so. It goes through branches, online and mobile banking, telephone banking. Let's analyze these methods of offering banking services step by step.

➤ Banking services offered by branch

A bank branch is a physical location where your banking can be done in person. You can go to a branch for a roll of quarters or a cashier's check that you need right away. You may want to rent a safe to store valuables or important documents.

Or maybe you just prefer to speak to a banker in person when you have questions about how to choose the right products and services for your financial needs.

➤ The offer of online and mobile banking services

Many banks allow you to manage your money from a computer or smartphone connected to the Internet. Some online banking and mobile apps allow you to bank from almost anywhere at your own pace. With a 24/24 access, you can do everything from managing multiple accounts to paying bills to transferring money.

➤ The offer of telephone banking services

Some banks allow you to do banking over the phone. You simply call a phone number and speak to a bank employee to receive service. These services may include checking your balance, transferring money, paying bills, or other banking needs.

If you’re calling outside of your bank’s regular business hours, you may need to use an automated system that will guide you through the steps needed to complete your transactions. That’s where artificial intelligence comes in. Check out our article on how artificial intelligence fits into business.

The different types of banks

There are many types of banks in the world and each has its own purpose. Know the types of banks at your disposal is important when making financial decisions. Whether you want to open a savings account or take out a loan. Learn more about the different types of banks and who serves them best.

Commercial banks

These are the most common ones, the ones you come across on every street corner. Think of them as the supermarkets of finance. They do a bit of everything: checking accounts, savings, loans, credit cards… In short, the complete package for Mr. and Mrs. Average.

These banks play a crucial role in the economy. They take the money you deposit and lend it to others. It's like lending your toy to a friend, except here, it's your money that works while you sleep. The thing is, they're there to make a profit. They give you a little interest on your savings, but they charge a lot more to those who borrow. It's the difference between the two that makes their money.

These banks can be huge, like international behemoths, or smaller and local. There is something for everyone. Some focus on in-branch service, others are 100% online. The big advantage is that you have everything under one roof. Need a car loan? Open a savings account for the little one? No need to run around, your commercial bank handles all that.

But be careful, they also have their flaws. The costs can quickly climb if you're not careful. And sometimes, you feel like you're just another number.

Investment banks

Now, we're completely changing universes. Investment banks are the world of high finance, the kind of thing you see in Wall Street movies. These banks don't play with the money of small savers. No, they take care of the big fish: large companies, governments, wealthy investors. It's like going from an amateur football match to the Champions League.

Article to read: The 14 most used Islamic financial instruments

Their job? They help companies raise money, handle mergers and acquisitions, and trade on the financial markets. Basically, they make billions like you and I play Monopoly. The thing is, they take huge risks. When it works, they make huge profits. But when it fails, it can shake the entire global economy. Remember 2008? That was largely due to the bullshit of some investment banks.

These banks attract the sharks of finance. The guys who work there are often brilliant, but also stressed and hyper competitive. It's a world where you can make a fortune in one day... or lose everything. The big problem is that sometimes the line between legal and illegal practices becomes blurred. There have been quite a few scandals in this environment.

3. Cooperative banks

Complete change of atmosphere with the cooperative banks. Here, we are more in the spirit of "all for one, one for all" than in the race for profit. The principle is that these banks belong to their customers, who are called members. It's as if you were both a customer and owner of your bank. Cool, right?

The idea behind all this is to create a bank that truly serves the interests of its members rather than those of greedy shareholders. As a result, profits are often reinvested in the bank or redistributed to members. These banks tend to be more locally anchored. They know their territory well and are often more inclined to support local projects. It's a bit like your bank being your friendly neighbor who helps you carry your groceries.

Another cool thing: every member has a say in major decisions. You have the right to vote at general meetings. It's banking democracy, in a way. The downside is that they are sometimes less technologically advanced than large commercial banks. And their services can be a little more limited.

But overall, if you're tired of big impersonal banking machines, cooperative banks can be a good alternative. It's like choosing a local organic grocery store instead of a hypermarket.

4. Online banks

Welcome to the 21st century, man! Online banking is a bit of a revolution in the banking sector. Imagine a bank without branches, without counters, just your smartphone and presto, you have everything you need. The main advantage? Fees, my friend. Since they don’t have a branch network to maintain, these banks can offer services much cheaper, or even free. It’s like shopping on Amazon instead of at a luxury store.

Another big advantage: flexibility. Do you need to do a transaction at 3am? No problem, it's open 24/7. No need to run to the bank during your break already. These banks are betting a lot on innovation. They are often the first to offer cool stuff like mobile payment, facial recognition to log you in, etc. It's a bit like having a science fiction bank in your pocket.

On the other hand, you have to be comfortable with technology. If you're the type of person who struggles to send a text message, it might be complicated. And if you have a problem, there's no friendly advisor in front of you to help you. You have to go by phone or chat. Another thing to know: these banks are often less flexible for loans. If you have a slightly atypical profile, it can be harder to get a loan.

5. Central banks

Ah, central banks… They are a bit like the conductors of the entire financial system. They don’t play in the same league as other banks, it’s a completely different sport. These banks don’t take care of your current account or your mortgage. No, their job is to manage the monetary policy of the country (or the eurozone for the ECB). It’s as if they had the levers of the economy in their hands.

Their great power is to set the key interest rates. It sounds boring when you say it like that, but in fact, it influences everything: the rate of your credit, inflation, the value of the currency... In short, decisions that impact your wallet without you realizing it.

Central banks are also responsible for printing money. They decide whether to put more or less into circulation. It's a bit like controlling the money tap. Another important mission: they monitor other banks. They're like the policeman of the banking system. They make sure that everyone plays by the rules to avoid crises.

The thing is, they're supposed to be independent of political power. In theory, eh. In practice, It's sometimes a little more complicated.

How to choose a bank that suits you?

Bank or credit union? Should I choose an online bank or a physical bank? Islamic bank or conventional bank? There are many choices when it comes to choosing the right financial institution. Each has its own advantages and limits. By understanding them, you can decide what is most important to you.

In fact, choosing the right bank is a important financial decision. Make sure you understand all of your banking options, products and services. Besides, I invite you to explore some criteria which, in my opinion, allow you to choose a good bank.

➤ Think about the types of accounts you want to open

Do you just need a basic checking account or are you looking to save? Decide what types of bank accounts you want, then look for a bank that offers what you're looking for.

➤ Discover the other services offered

Some people like to manage all of their finances with the same company. If you want to do more than just store your money in a bank, see if it offers any of the following products and services: investment accounts, mortgages and other loans (personal, auto, private student loans).

➤ Look for low-cost establishments

You don't want to lose money by opening a bank account. Let's say you have three accounts with an institution, and it charges a monthly fee for each account. It can really add up! When it comes to monthly service fees, you'll likely want a bank that offers one of the following: No charges, Fees you can waive, Low fees, Overdraft fees, etc

➤ Choose between a physical bank and an online bank

Decide whether you want a bank with physical locations or an online bank. You may prefer a brick-and-mortar bank if you'd like to be able to walk into a building and talk to a banker in person. But online banks generally charge lower fees and pay rates higher interest rates.

➤ Make sure your bank is accessible

If you like physically entering your financial institution, look at which banks and credit unions have branches near your place of residence or work. If you travel a lot, you might appreciate an institution with more branches.

Otherwise, you might just want to go with what works for you. If you use an ATM for many transactions, check how many there are in your area and how much it will cost you to use. Many credit unions have a community charter. This means that if you live or work in the community they serve, you can become a member.

If you are considering a credit union, make sure you are eligible for membership. Banks have no limits to their customers. If you prefer online or mobile access to your accounts, check out some bank and credit union websites. Most offer online banking services and mobile, but some may be more accessible than others.

➤ Consider the type of bank: Islamic or conventional

If you want to carry out interest-free transactions, opt for Islamic banks. They are participatory banks because they share losses and profits with their customers. They are completely different in the way they operate. The reality is that Islamic finance has its principles.

Summary …

By better mastering the operation of banks and the various investments, you will be able to invest knowingly and serenely build up your assets. TIt's all about balancing return, risk and investment horizon based on your goals.

So, are you ready to embark on the adventure of investing? It's well worth the effort to secure your financial future! Also learn about Islamic banks. Before you leave, here is a training that teaches you how to sell advice online. Click here to buy it.

Go for it Good luck

I am a Doctor in Finance and an Expert in Islamic Finance. Business consultant, I am also a Teacher-Researcher at the High Institute of Commerce and Management, Bamenda of University. Group Founder Finance de Demain and author of several books and scientific articles.

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