Banking institutions were created out of a need to satisfy the market to provide loans to the public. As economies grew banks allowed the general public to increase their credit and make larger purchases. The bank is the greatest financial institution of the economy, that help you save and protect your money and help you borrow finances. They accept deposits from the public and create credit. They are important for the financial stability of a country. Nobody can ever think that the Banking System will make you poor. Now let’s flip the coin.
Banks are the richest institutions we have. They are in the business of lending money and they make money by lending, so they want you to buy things you can’t naturally afford. They earn through the interest and fees the consumer pays. In 2017, banks, in first time ever in history, made over a $100 billion from credit card interest payments alone! (You’re credit card is expensive!). So basically the entire banking system is making you poor, even if you don’t have any debts.
Suppose you have Rs. 1000 with you. Because you can’t keep it under your mattress, you go to the bank and deposit it in your savings account. But the bank does not keep this amount in your private wallet- that would be a losing transaction for the bank. Instead they take your Rs. 1000 and lend it to people and obtain interest in return. Obviously banks make more money when they have more money to lend out, as they can lend to more people further. This signifies more credit cards and credit lines.
What if you come to know the banks have a printer to copy and double the money? Stupid to hear. But true. Here the banks play the game. They practise what is called as “fractional lending”.Fractional reserve banking is a banking system in which banks only hold a fraction of the money their customers’ deposit as reserves. This allows them to use the rest of it to make loans and thereby essentially create new money. By a deposit of Rs. 1000, they are able to generate as much as Rs. 10,000. But who actually pays when the banks generate their own money?
Nothing is free.
When more money is printed, there is more money in circulation in the economy, which eventually decreases the value of the currency in use. This happens because when there is increased supply of anything, its value goes down. So the value of money sitting in your bank account goes down, which causes the price of things to go up. This creates a hidden tax called inflation, which makes the cost of living go up, and it makes majority of people poorer because your money is losing value and your money is losing buying power. Thus, the entire game of the banking system is making you poor.
Here is another expensive mistake. Consumer pay fines for being broke. The bank charges fines in case you overuse your actual account money or you don’t maintain minimum amount in it. In 2017, banks made $34 billion from over-debt fees. Putting simply, they made billion dollars from people who had no money to begin with! Also, banks love low-income consumers. They lure them to sign up for things such as prepaid debit cards and payday loans-products that typically come with all sorts of fees and charges. Why are banks courting these customers with pricey products?
Well, besides the obvious (fees) the products themselves weren’t subject to the entire regulatory overhaul. That leaves more room for banks to make money in an environment where doing so has become more difficult. Traditional banks are more expensive for lower-income individuals to use, as they are at a higher risk of being assessed fees from overdrafts, bounced checks or late payments. This, interestingly enough, strikes at the heart of the logic employed by a number of the nation’s biggest banks, and reasons why they offer services like free checking accounts. Essentially, those free services end up being immensely profitable, mostly because the poor end up with an avalanche of fees and charges, creating a cycle of debt that many aren’t able to pay their way out of.
Next, when you deposit your money in the bank, you allow the bank access to your money so that they can lend it further. Surprisingly, most banks then charge you for accessing your own money, through ATM charges and monthly charges. Also, when you cheat on your bank by withdrawing cash from a competitor’s ATM, a warning message on the screen makes it clear customers will likely face various fees, another sneaky way of the bank to rob you. So next time, ask before signing up for any bank and opt for the bank which has the minimum charges of this kind.
Another costly affair most consumers fail to understand is when their bankers try to become their financial planner. Banks are in the business of making money, not for you, but for itself. They make money by lending you money and luring you into ideas of reconstruction, which might not be required. So, the consumers borrow money and pay interests for things they don’t need or can’t actually afford. Thus, the banking system makes you poor.
However, this only works well if the consumer borrows to invest in income generating assets, in other words, to create wealth.
Since keeping all your money in your closet isn’t a good option, keeping all of it at bank isn’t very perfect too. Banks offer interest rates less than the rate of inflation, which means you receive a minute perk against rising prices, making you poorer. The bank robs you off through various fees and charges, increases the price of living, and gives you a minimal interest to keep you stuck to itself.
Banks, like any other business, need to make a profit. While you can’t fault banks for wanting to improve their bottom line, sometimes it comes at your personal expense through unnecessary or hidden fees. But, if you’re aware of how most banks make money, you can end up saving a ton of money in the long-run.
This doesn’t mean you should not use the banks.
Stop saving money just to save it. Saving is losing. Instead spend. Spend on investments that grow faster than inflation, which would give you income. This way you don’t lose in this game of the banking system which is essentially making you poor. Even if the value of assets you own goes down, you have your income through investments, and you don’t have to wait for years to see if you made some profit. Assets and investments grow with inflation, putting you in a win-win situation.
Your bank’s job isn’t to do what’s best for your want. That’s your job!