How Do Commercial Banks Work, and Why Do They Matter?

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Commercial banks offer basic banking services to individuals and small to midsize businesses. These services include checking and savings accounts, loans, mortgages, CDs, and safe deposit boxes. Banks earn money through various fees, such as account maintenance, overdrafts, and safe deposit box charges. Additionally, many loans come with fees besides interest. Banks make money by charging higher interest rates on loans than what they pay on customer deposits. For instance, a bank might pay customers 0.25% interest on savings accounts but charge borrowers 4.75% for mortgages. The difference between these rates is how they earn profit.
Traditionally, commercial banks operated in buildings where customers used teller services and ATMs. However, with advancements in internet technology, most banks now offer online services, allowing customers to conduct activities like transfers, deposits, and bill payments without visiting in person.

Commercial banks play a crucial role in the economy by offering essential services to consumers and enhancing market liquidity. They use customer deposits to provide loans, fostering credit creation. This process boosts production, jobs, and consumer spending, ultimately benefiting the economy. Due to their significance, commercial banks are strictly regulated by their country’s central bank, which sets rules like requiring banks to hold a portion of their deposits as a safety measure against sudden large withdrawals.

Analysis
Brick-and-mortar banks are crucial in the financial world due to their personal touch, building trust, especially for complex or sensitive matters. Many, especially older customers, value face-to-face interactions for clear and tailored advice. These banks symbolize financial stability in communities and address immediate banking needs that might not be quickly resolved online. In areas with limited internet or among those less tech-savvy, these banks are vital. They also strengthen their community role by hosting events and workshops. Despite the rise of digital banking, traditional banks remain essential for community engagement, accessibility, and personalized service.


Kagan, Julia. “How Do Commercial Banks Work, and Why Do They Matter?” Investopedia, Investopedia, www.investopedia.com/terms/c/commercialbank.asp#:~:text=Commercial%20banks%20make%20money%20by,capital%20to%20make%20these%20loans. Accessed 5 Sept. 2023.