Explain it Like I’m Five: How Do Banks Work?

Explained like you’re 5: What is a bank?

A bank is a financial institution that keeps your money safe and helps you deposit your income, pay bills and save money.

Banks and credit unions have something called deposit insurance, which protects your deposited cash if the institution goes out of business. This coverage is typically up to $250,000.

Instead of having to carry cash everywhere you go or keeping it under your mattress, you can store it in an insured bank account. Once it’s there, the bank maintains a record of exactly how much you have and lets you access it when you need it.

Another big part of what banks do is help you save. They offer savings accounts for long-term saving and may pay you a small amount of interest as your balance grows. When you need to borrow money to buy a car or purchase a home, banks can also lend you money and let you pay it back over time.

Put simply, banks exist so you don’t have to manage your money alone. They provide security and systems that make handling your financial life much easier.

How do banks make money?

When you keep your money in an insured account, the bank uses a portion of those funds to issue loans to other customers. Don’t worry: You can still withdraw your funds at any time. In return, borrowers pay interest on those loans. That interest is one of the main ways banks make money.

Besides that, banks also make money by charging fees, providing investment services and earning credit card interest from customers who carry a balance.

Other things to know about banks

Banks can do a lot. They can be a place to store your earnings, send money to a friend with services like Zelle or even send money internationally.

While banks can offer a lot of products, checking and savings accounts are their bread and butter.

Checking accounts

Checking accounts are the most common types of bank accounts you’ll see. These accounts are designed for daily use and spending. For easy management, you can have your paycheck sent to your checking account if you sign up for direct deposit.

Checking accounts come with a debit card you can use for in-person and online spending. You can also use this debit card to withdraw money from your account at an ATM.

Some checking accounts might charge maintenance fees or overdraft fees, but there are many no-fee checking accounts, and many banks offer fee waivers.

Savings accounts

Checking accounts are for spending, whereas savings accounts are for money you want to set aside and use less often.

When you put money in a savings account, most banks will pay a small amount for keeping your money there, also known as interest. That interest typically compounds daily, monthly or quarterly and is usually paid monthly.

Interest rates on savings accounts vary by bank, but online banks generally offer the highest rates since they don’t have overhead and can afford to pay you more.

One thing to know about savings accounts is that most limit the number of withdrawals you can make per month. If you pull money out too often, your bank might charge you a fee or stop you from making transfers.

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SoFi Checking and Savings

With SoFi Checking and Savings get paid up to two days early. Set up direct deposit to automatically get your paycheck up to two days early every time you get paid

• Up to 3.60% APY on savings by meeting deposit requirements or by paying the SoFi Plus subscription fee every 30 days
• Get up to a $300 bonus with direct deposits of $5,000 or more
• $0 account or overdraft fees

Partner terms and conditions

New and existing Checking and Savings members who have not previously enrolled in Direct Deposit with SoFi are eligible to earn a cash bonus of either $50 (with at least $1,000 total Eligible Direct Deposits received during the Direct Deposit Bonus Period) OR $300 (with at least $5,000 total Eligible Direct Deposits received during the Direct Deposit Bonus Period). Cash bonus will be based on the total amount of Eligible Direct Deposit. If you have satisfied the Eligible Direct Deposit requirements but have not received a cash bonus in your Checking account, please contact us at 855-456-7634 with the details of your Eligible Direct Deposit. Direct Deposit Promotion begins on 12/7/2023 and will be available through 1/31/2026. Full terms at sofi.com/banking. SoFi Checking and Savings is offered through SoFi Bank, N.A., Member FDIC.

SoFi members with Eligible Direct Deposit can earn 3.60% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. There is no minimum Eligible Direct Deposit amount required to qualify for the 3.60% APY for savings (including Vaults). Members without Eligible Direct Deposit will earn 1.00% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Interest rates are variable and subject to change at any time. These rates are current as of 11/12/25. There is no minimum balance requirement. Fees may reduce earnings. Additional information can be found at http://www.sofi.com/legal/banking-rate-sheet.

Annual percentage yield (APY) is variable and subject to change at any time. Rates are current as of 11/12/25. There is no minimum balance requirement. Fees may reduce earnings. Additional rates and information can be found at https://www.sofi.com/legal/banking-rate-sheet

We do not charge any account, service or maintenance fees for SoFi Checking and Savings. We do charge a transaction fee to process each outgoing wire transfer. SoFi does not charge a fee for incoming wire transfers, however the sending bank may charge a fee. Our fee policy is subject to change at any time. See the SoFi Bank Fee Sheet for details at sofi.com/legal/banking-fees/.

SoFi Bank is a member FDIC and does not provide more than $250,000 of FDIC insurance per depositor per legal category of account ownership, as described in the FDIC’s regulations. Any additional FDIC insurance is provided by the SoFi Insured Deposit Program. Deposits may be insured up to $3M through participation in the program. See full terms at SoFi.com/banking/fdic/sidpterms. See list of participating banks at SoFi.com/banking/fdic/participatingbanks.

We’ve partnered with Allpoint to provide you with ATM access at any of the 55,000+ ATMs within the Allpoint network. You will not be charged a fee when using an in-network ATM, however, third-party fees may be incurred when using out-of-network ATMs. SoFi’s ATM policies are subject to change at our discretion at any time.

Early access to direct deposit funds is based on the timing in which we receive notice of impending payment from the Federal Reserve, which is typically up to two days before the scheduled payment date, but may vary.

Overdraft Coverage is a feature automatically offered to SoFi Checking and Savings account holders who receive at least $1,000 or more in Eligible Direct Deposits within a rolling 31 calendar day period on a recurring basis. Eligible Direct Deposit is defined on the SoFi Bank Rate Sheet, available at https://www.sofi.com/legal/banking-rate-sheet. Members enrolled in Overdraft Coverage may be covered for up to $50 in negative balances on SoFi Bank debit card purchases only. Overdraft Coverage does not apply to P2P transfers, bill payments, checks, or other non-debit card transactions. Members with a prior history of unpaid negative balances are not eligible for Overdraft Coverage. Eligibility for Overdraft Coverage is determined by SoFi Bank in its sole discretion. Members can check their enrollment status, if eligible, at any time by logging into their account through the SoFi app or on the SoFi website.

Earn up to 4.30% Annual Percentage Yield (APY) on SoFi Savings with a 0.70% APY Boost (added to the 3.60% APY as of 11/12/25) for up to 6 months. Enroll in SoFi Plus between 9/18/25 and 1/31/26. Rates variable, subject to change. Terms apply at sofi.com/sofi-plus SoFi Bank, N.A. Member FDIC.

How do I get started with banks?

If you’ve never worked with a bank before, here’s a quick guide on how to get started.

1. Decide what type of account you need. A checking account is for daily spending. A savings account is for goals and emergencies. Many people open both at the same time.
2. Compare banks. Take your time to compare things like fees, interest rates, customer service and ATM access. Also, check whether the bank’s app and website are easy to use.
3. Apply online or in person. To open an account, you’ll typically need to provide a government-issued ID, your Social Security number and some basic personal information.
4. Make your first deposit. This initial deposit could be cash, a transfer from another bank or your first paycheck through direct deposit. Some banks may require a small opening deposit, often between $1 and $100, to open the account.
5. Set up mobile banking. Many banks now offer mobile banking so you can manage your money on the go. All you have to do is download the bank’s app, set up alerts and connect your account to any payment apps you use.

Related: How to Open a Bank Account

Bottom line

At their core, banks help you protect your money and simplify your financial life. When you understand how different accounts work and how banks operate, you can choose the right bank with confidence and make smarter decisions with your money.

If you’re overwhelmed by all the options, compare types of bank accounts to find the one right for you.

Frequently asked questions

• What is federal deposit insurance?

  FDIC and NCUA insurance protect your deposits in the unlikely event that the bank experiences financial trouble or shuts down. As long as you're banking with a federally insured institution, your deposits are protected up to $250,000 per depositor, per institution, per ownership category. This coverage applies to deposit accounts, including checking accounts, savings accounts, certificates of deposit and money market accounts.
  You can check whether your bank is FDIC-insured by using the FDIC's BankFind Suite or researching insured credit unions via the National Credit Union Administration.

• What's the difference between a bank and a credit union?

  Credit unions are nonprofit, member-owned and typically come with lower fees and better savings rates. Banks are for-profit and may have more technology and branch locations.Traditional banks, like Chase and Bank of America, have physical branches you can walk into. They're great if you want in-person service, but they may charge more fees and offer lower interest rates on savings since they have to maintain their physical infrastructure, like branches and ATM networks.
  Online banks like Ally and SoFi® operate through apps and websites and don't have any physical branches. Since their costs are lower, online banks can offer higher interest rates on savings and charge fewer fees.
  As long as they're FDIC-insured, online banks are just as safe as traditional ones.

• What's the difference between a debit card and a credit card?

  A debit card pulls money directly from your checking account, whereas a credit card lets you borrow money that you repay later.

• How do banks keep my account secure?

  Banks keep your account secure using tools like encryption, fraud monitoring, account alerts and two-factor authentication.

• Can I lose money in a bank account?

  Not if your bank is FDIC-insured and you stay within coverage limits. Your deposits are protected up to $250,000 per account category, even if the bank fails. Since the founding of the FDIC in the early 1930s, no one has lost money on their insured funds thanks to deposit insurance.