May 26 2011
By
fizfaz | Filled under:
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If you are noticed, currently banks are really increasing advertising about their high interest rates for checking and savings accounts? Why are those banks doing this? How are they managed to do it, in term of economic perspective? How the bank can still make money with those high interest checking account or saving account?
If we think by normal logical thinking, we can know already that with higher interest checking account, the bank will decrease their profit but, keep in our mind that the cycle is not for short term business only as the bank will think for long term business.
Basically the banks make money in the economy by making loans. The sum of money that banks can lend is directly affected by the reserve requirement set by the Federal Reserve. The reserve requisite is currently 3% to 10% of a bank’s total deposits. This amount can be held either in cash on hand or in the bank’s reserve account with the Fed. If you want to see how this give impact to the economy, think about it like this.
The simple chronology is when a bank gets a deposit of $100, assuming a reserve requirement of 10%, the bank can then lend out $90. That $90 goes back into the economy, purchasing goods or services, and usually ends up deposited in another bank. That bank can then lend out $81 of that $90 deposit, and that $81 goes into the economy to buy goods or services and finally is deposited into another bank that continuously to lend out a percentage of it.
When the cost to loan individual money comes down for a bank, the bank can reduce your interest on a credit card or financing for a home. The same is true on the banking side, since banks are getting a break lately on the cost to lend, they do not required as much interest from the customer to cover the spread. They could either keep the extra money for themselves or offer an incentive to the customer by providing a higher interest rate on checking and savings accounts. This benefits current customers and encourage new customers in. Banking has become so competitive, so most banks follow suite so they will not get left in the dust.
The banks do put pre-conditions on some of these accounts that you need to be aware of. You may have limits on withdrawals, number of checks you write, and you may have to have a minimum number of transactions per month. The main reason the banks have those conditions is simple; of course, it’s all geared in their favor.
Limiting withdrawals keeps more people’s money in the bank that they use to invest and loan and make more money for, well, the bank. Limiting the number of checks you write saves the bank money because it costs them more to process paper. The bank also forces you to use your debit card more and that is why they have a minimum number of transactions, so you use the debit card more. By using the debit card or credit card, merchants are paying a fee to the bank for every transaction. In other words, no matter how you slice it, the banks are making money. It then makes sense to try to get some of that money back in an interest bearing checking or savings account.
There may be penalties for not abiding by these conditions. Most of the requirements banks have are not overly restrictive. At the end of the day, higher interest rates for checking accounts and savings accounts are a great opportunity to gain some ground in this economy. Furthermore, the customer can get more benefit such as get the best rewards checking account with high interest rate from selected bank.
