Microeconomics

People keep their money in banks and receive a small amount of interest. The bank takes this money and lends it out at much higher interest rates. This system is necessary in a free market economic system because it provides resources for people to buy things like homes or for industries to expand their businesses.

In short, banks take unused funds from savers and turn them into funds that society can use for various activities. In addition to accepting savings deposits, banks get income from the credit card business, buying and selling currencies, custodian business such as stocks and bonds, and cash management services like money market funds. There are three types of banks:

• Consumer banks, also known as retail banks, are typical mass-market banking institutions that provide local branches for customers’ convenience.
• Investment banks specialize in large, complex financial transactions. Individuals, corporations, and governments are charged a yearly fee for services, and there are no commissions on sales.
• Merchant banks deal in commercial loans and investments and are experts in international trade. Instead of loans, banks provide capital to companies in the form of share ownership.

Credit unions provide the same financial services as banks but focus on shared value rather than profit maximization. Their goal is to help members create opportunities like starting small businesses or building family homes. Credit unions are controlled by their members, who elect a board of directors.

Consumers can also use a credit card or debit card to purchase goods and services. Credit cards have higher annual percentage rates (APRs) than other lines of credit and forms of consumer loans. The APR is the annual cost of taking out a loan. There is no interest on purchases if the balance is paid in full each month by the due date. Debit cards may be free to use, or there may be processing fees.

• Debit cards take money from a checking account when a purchase is made.
• Credit cards charge the cost of a purchase to a line of credit.