Why do banks offer incentives like interest on money you deposit into savings accounts?
1. the money is not insured if not in a savings account
2. they keep money secured in a vault
3. they loan the money deposited back out to other customers
The primary reason why banks offer incentives like interest on money deposited into savings accounts is to attract customers and encourage them to save their money in the bank. Let's delve into a more detailed explanation of these incentives:
1. Interest - By offering interest on savings accounts, banks provide customers with a return on their deposit. This encourages individuals to save money, as their funds will grow over time. Interest payments act as a reward for keeping money in the bank and provide an incentive to save more. Additionally, interest rates offered by banks are often higher than the inflation rate, allowing individuals to maintain or increase the purchasing power of their savings.
2. Security - While it is true that banks keep money secured in vaults, this benefit doesn't directly relate to the incentive of interest on savings accounts. The security aspect primarily ensures that the money deposited in the bank is protected from theft or physical damage. The primary reason for offering interest is to incentivize customers to save their money with the bank and not keep it stored elsewhere or under the mattress.
3. Loaning and Investments - Banks do indeed utilize the funds deposited by customers to lend money to other individuals or businesses in the form of loans. When a bank makes a loan, it charges interest on the borrowed amount. The interest collected from these loans is typically higher than the interest paid to customers on their savings accounts. The difference between the interest earned on loans and the interest paid on savings accounts is known as the spread, and it represents one way banks generate revenue.
In summary, banks offer incentives like interest on savings accounts to attract customers, encourage them to save their money, and keep their funds deposited within the institution. By providing returns on savings, banks can secure a stable source of funds to use for lending and investment purposes while also generating revenue through the spread.