Why Do Banks Exist?

24 Jan 2023

Banks exist to provide a variety of financial services to individuals, businesses, and organizations. These services include accepting deposits, making loans, and facilitating transactions. Banks use the funds deposited by customers (such as savings and checking accounts) to make loans to other customers. The interest charged on loans is typically higher than the interest paid on deposits, allowing banks to earn a profit.

The main function of banks is to act as intermediaries, connecting borrowers and savers. Banks take deposits from savers, and then use those funds to make loans to borrowers. They also provide other services such as issuing credit and debit cards, providing online banking and mobile banking services, foreign exchange, and investment services.

Banks also play a critical role in the economy by helping to facilitate the flow of funds between borrowers and lenders, and by providing a safe place for people to store their money (although we know this hasn’t always been the case). Banks also help to stabilize the economy by lending money to businesses and individuals, which can help to create jobs and promote economic growth. Additionally, Banks also act as a regulator of the money supply and help to stabilize the economy by managing interest rates.

In summary, Banks exist to provide financial services, connecting borrowers and savers, facilitating transactions, and helping to stabilize the economy by promoting economic growth and managing interest rates.

So what’s the difference between an online investing platform like LifeGoals and a bank? LifeGoals empowers investors to find the right portfolio for them by analysing time horizon, risk tolerance and type of goal and guides them towards implementing strategies such as automatic contributions and rebalancing in order to meet a specific financial goal. While banks, most notably national banks, have the ability to influence interest rates in order to stabilize the economy, that’s not something we can do. Global investments can be affected by banks which in turn would affect our portfolios. We do, however, provide some similar services such as accepting deposits and investing.

You might be wondering where you should put your money. That’s a personal decision but there are a few questions to ask yourself:

When will you need your money? Traditional banks offer savings accounts that you can access alongside your chequing account so if you’ll need your money in the next 1–2 years, this might be a good option. Many online investing services also offer savings accounts as well, so be sure to see where your money is being held. This might be just in the bank with a guaranteed interest rate or it might be spread across a variety of relatively secure investments.

If you won’t need your money for longer, such as 5+ years, you probably want to consider investing your money in a diversified portfolio whether at a bank or an investing service. In most cases online investment services charge lower fees than traditional financial advisors.

What are you willing to pay in fees? As we said, usually traditional financial advisors at banks charge higher investment fees than online investing services. Generally, you need to meet with your advisor, either in person or maybe in a video call, go in to sign paperwork and while your investments are probably still passive, there is a more hands on approach and you will most likely pay for it.

Online investing services, like ours, are also passive, and we also offer support through our Support Centre with actual live financial experts. We charge a maximum of 0.75% for our management fees because we believe investing should be available to everyone.

What options do you want as an investor? Some banks only offer traditional mutual funds, some offer ETFs, and there are other options as well depending on your country or bank. Online investors also have a variety of options, although most focus on ETFs. Within ETFs there are infinite options. Portfolios offered are usually made of a variety of holdings and depending on the risk profile, however, even within the multitude of investments there are usually other things to consider. Are you concerned about sustainability? Many offer ESG options too.

Investors must consider what is most important for them, and their financial goals.