What is a bank & how does it work? An overview for families

Banks are everywhere. But what exactly is a bank, and what does it do? Whether you're helping your child open their first savings account or just want a quick refresher yourself, we've got you covered.

Let’s break it down: What banks are, what they do, and how they help keep your money safe and growing.

Bank basics: What they are and what they do

At its core, a bank is a financial institution that accepts deposits, lends money, and offers financial services. In everyday terms? Banks are places that help people manage money,  whether it's saving it, spending it, or borrowing it.

Banks help:

• Keep your money secure with tools like FDIC insurance and fraud protection

• Provide easy access to your funds through ATMs, debit cards, and online banking

• Offer a safe place to save money and earn interest over time

• Extend credit through loans and credit cards when needed

They also play a huge role in the larger economy by supporting both personal and business growth. When you deposit money in a bank, it doesn’t just sit there. That money helps fund loans for people buying homes, starting businesses, or going to school. In this way, banks act as engines that keep money moving.

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Types of banks: Not all are the same

Banks come in different forms, each with a different focus. Here are the main types:

1. Retail banks

These are the banks most people interact with. They provide checking and savings accounts, debit cards, personal loans, and other day-to-day financial services. Think of names like Chase or Bank of America.

2. Commercial banks

These banks serve businesses rather than individuals. They offer larger-scale financial services like business loans, credit lines, and payroll accounts.

3. Central banks

These are government-run banks like the U.S. Federal Reserve. They don’t serve individuals directly but instead oversee the country’s money supply and interest rates.

4. Online banks

Banks that operate entirely online often offer higher interest rates and lower fees since they save money by not having physical branches. These can be a great fit for tech-savvy families.

5. Credit unions

Credit unions are not-for-profit financial institutions owned by their members. They offer many of the same services as banks but are often more community-focused. They may offer lower fees and better customer service.

How banks make money

You might be wondering: If banks pay us interest, how do they stay in business? Great question!

Banks earn most of their money by:

• Lending your deposited money to borrowers and charging them interest

• Charging fees for certain services, like overdrafts or account maintenance

• Investing in safe, low-risk assets like government bonds

The difference between the interest they pay you and the interest they collect from loans is called the "spread" and it’s a big part of how banks make a profit.

Are banks safe?

Generally, yes—especially in countries like the United States. Most banks are insured by the FDIC (Federal Deposit Insurance Corporation), which protects deposits up to $250,000 per account holder per institution.

This means that even if a bank fails, your money is still protected. For credit unions, similar protection is offered through the NCUA (National Credit Union Administration).

Banks also have cybersecurity systems, fraud monitoring, and other safety features in place to help protect your money.

When do families need a bank?

Most families rely on banks to handle their everyday finances. Here are just a few examples:

• Saving for college or future expenses

• Managing household bills and monthly budgets

• Depositing paychecks securely

• Getting a loan for a car or home

• Teaching kids and teens how to manage money

Banks can also be a great first step for kids learning about money. For instance, a savings account gives them a place to watch their balance grow while using a debit card can help teach budgeting and spending decisions. 

Many banks offer teen or student checking accounts, but if you’re looking to teach financial literacy early, consider an all-in-one money management app like Greenlight, that has no age restrictions and allows kids and teens to learn how to save, spend, and even invest wisely. 

What to consider when choosing a bank

Choosing a bank is a personal decision. The best choice depends on your family’s habits and financial goals. Consider these questions:

• Are there any monthly fees or minimum balance requirements?

• What is the interest rate on savings accounts?

• Are there nearby ATMs or branches?

• Is mobile or online banking available?

• Are there tools or programs for young account holders?

Families looking for flexibility and tech-friendly features might lean toward online banks, while those wanting face-to-face support may prefer a traditional one.

Greenlight's role in family finance

While Greenlight isn’t a bank, it offers many of the tools families need to manage money day-to-day. From spending controls and savings goals to investment education, Greenlight is built to teach kids how to make smart financial decisions early on.

Want more money know-how? Meet the Greenlight debit card and app for the next generation. Kickstart a lifetime of financial literacy today💰Try Greenlight, one month, risk-free.†

This blog post is provided "as is" and should not be relied upon as a substitute for professional advice. Some content in this post may have been created using artificial intelligence; however, every blog post is reviewed by at least two human editors.