Have you observed that banks are really increasing advertising about their high interest rates for checking and savings accounts? Why are they doing this? How are they able to do it?
Banks make profit in the economic system by bringing in loans. The sum of money that banks can lend is immediately affected by the reserve prerequisite set by the Federal Reserve. The reserve requirement is currently 3 percent to 10 percent of a bank’s total deposits. This amount of money can be held either in hard cash or in the bank’s reserve fund with the Fed. To see how this bears upon the economy, think of it like this. When a bank gets a alluvial of $100, bearing a reserve requirement of 10 percent, the bank can then lend out $90. That $90 comes back into the economy, purchasing trade goods or services, and usually winds up deposited in another bank. That bank can then lend out $81 of that $90 deposit, and that $81 enters the economy to buy goods or services and in the end is posited into another bank that continues to loan out a per centum of it.
While the cost to loan individual money goes down for a bank, the bank can bring down your interest on a charge card or financing for a home. As is true on the banking side, since banks are acquiring a break recently on the cost to lend, they don’t need as much interest from the customer to cover up the spread. They could either hang on to the additional revenue for themselves or propose an incentive to the customer by providing a higher interest rate on free checking and savings accounts. This benefits current clients and lures new customers in. Since banking has become so competing, most banks follow suit so they will not be left out.
The banks do put conditions on some of these account statements 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 minimal number of dealings per month. The main reason the banks have stipulations is simple; its all geared in their favor. Limiting withdrawals keeps more of your money in the bank that they use to invest and loan and make more money for, well, the bank. Constraining the number of checks you compose saves the bank money because it costs them further to process paper. And, it 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 up a fee to the bank for every transaction. Put differently, never mind how you slice it, the banks are making money. It then adds up to try to get more or less of that money back in a high interest checking accounts or savings accounts.
There may be penalties for not complying with these conditions. Most of the requirements banks have are not overly constraining. At the end of the day, higher interest rates for checking and savings accounts are a great chance to gain some base in this economic system.