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- Okay, so I wanna start off this video here by asking you a question, and it's probably a question you've never been asked before but that is why do you have a bank account, why do you use a bank? And a lot of us don't really have a good answer for this question because the reason why a lot of us use a bank is because everybody else is using a bank, our parents have a bank account, our grandparents have a bank account, and when we became a certain age we also got our own bank accounts. Now there's absolutely nothing wrong with having a bank account. I have multiple different ones and I'm still going to use a bank but what I wanna show you guys in this video are a couple of things that the banks don't necessarily tell you or want you to know about their business. And banks do provide a very important service. We have money that we don't wanna leave out, we don't wanna be putting it under our mattress. We wanna put it in a safe place and to be honest with you guys, cash is not the most user friendly currency. In my opinion and obviously some older people will argue with this, I find using a card, debit card way more convenient or a credit card than paying in cash and carrying around change. So banks do provide us with a very useful service but there are a few things that you're going to want to know about using a bank account. And number one the first one is that you are actually losing money in most cases every single year with your bank account. Now I'm not talking about fees, we'll get to that later on. I'm not talking about them stealing your money, I'm talking about something else entirely called inflation. Now we've all been told that the bank is a safe place, it's the best place for your money, it's the safest place for your money but the bank is also in most cases a guaranteed place to lose your money because of our friend there inflation. And inflation is very simply an increase in the prices of goods and services over time. Meaning that $100 today will buy slightly less in a year and even less in five years. And so what you want to do as an investor is try to keep up with inflation and that just can't be accomplished in most bank accounts. So on average inflation sits at around 2% per year and we know that the average bank account in the United States pays about a 0.05% yield meaning that every single year most of us are losing about 1.95% of the buying power of that money we're holding in cash. Now there are definitely some alternatives to this. There are online bank accounts like Ally, there's Betterment Smart Saver, there's short term bonds. There are ways we can get a return on our investment without having all kinds of crazy risk and there are FDIC insured investments like CDs that will allow you to at least keep up with inflation. But we've talked about that a lot on my channel in the past. That's not the topic of this video. I'm gonna link up to another one that talks about how you can protect the buying power of your money and outpace inflation. Okay, so the second thing that a lot of people don't know about banks is that they earn money as you spend money, and that is through bank processing fees. So every time you go out there and you use your debit card, every time you swipe that debit card that merchant is paying a fee to the bank. And so a lot of people think of the bank as just a place to store your money but they're making money off of you in the process in a couple of different ways. That is why bank stocks are some of the most sought after investments out there. People, ya know a lot of people love investing in the banks because of all the different ways they make money and how they've become an everyday essential part of our lives. So every time you're at the store swiping your debit card, a small amount of money is going to your bank and that is typically being paid by the merchant. Okay number three, the third thing that is usually the most surprising thing for people is that the bank doesn't actually hold onto your money. I remember when I was a kid, I had a $2 bill that I found and actually someone gave it to me and I really wanted to hold onto it and I went to my dad and I said, I wanna put this in the bank that way I know it's going to be safe. And he said, that's the worst thing you wanna do because you're not gonna get that same $2 bill back. The way I imagined a bank was a box where they put my cash, but that's not how banks work at all because of something called fractional reserve banking. And this simply allows banks to loan out your money to other people. Now there are many good reasons for this. It frees up capital and it stimulates the economy but this fractional reserve banking resulted in a lot of the issues we had during the 2008 financial crisis when banks were overextended. So if for example ya know the bank had $100,000 of your money, they may not have your exact $100,000. Now they will have that amount of liquidity, assuming there is not something called a bank run and that's exactly what happened during the Great Depression. Everyone ran to the banks to withdraw their money at the same time out of fear and the banks simply did not have all that money on hand because of fractional reserve banking. Now is this something you have to lose sleep over? Not really, because we have FDIC insurance and you are protected with that money. If they were to go insolvent the US government would step in and they would protect people who had money with that bank but it is something that is worth understanding. Is that the bank takes your money and they loan it out to other people. They loan it out in the form of auto loans and mortgages and they collect interest on that and then they turn around and they pay you .05% yield on your checking or savings account. Number four, this is one of the dirtiest secrets of banking and I was just a victim of this a couple of months ago. And this is the fact that the banks typically wait until the perfect time to strike and that time is when you are traveling out of the country. What I'm getting at here is something called the foreign transaction fee. So most banks don't go crazy with the fees, otherwise you would leave them and you would say, ya know this is ridiculous. I'm not paying all these fees. I'm gonna switch to a different bank. But there are certain situations when banks have an absolute hay day and one of these is when you are traveling overseas, using your United States credit card or debit card. Now some credit cards to have programs where they do have coverage in different countries for free. I'm not a part of any of those, I probably should be after my learning experience here. But they will literally make a ton of money when you go overseas or you just leave the country and still use your US debit card. So back in January I went down to Mexico for 10 days. I was in Todos Santos and I used my debit card down there because they accepted it and I really didn't think anything of it. And then when I got home I opened up my bank statement and I could not believe what I saw. All of these different foreign transaction fees from every single swipe that I did while I was down in Mexico. And in total during the 10 days I was there that was $75.63 in foreign transaction fees that went into the pocket of my bank. Meanwhile, they're also making money from that merchant, they're making money from these fees, they had an absolute hay day with me. And obviously most banks are gonna charge us foreign transaction fee. If you're going to be traveling for an extended period of time or traveling a lot you're gonna want to find a way to spend your money without paying these fees but this is one area where banks absolutely capitalize on you is when you are traveling out of the country. And in the fifth and final thing that a lot of people don't know about banks is that they are watching you. Banks keep track of your financial activity and they are required by the US Treasury Department to report certain suspicious activity to the IRS. And now this is obviously in place because of a lot of shady stuff that was going on back in the day. It had to do with money laundering and back in 1970 they passed this Bank Secrecy Act which essentially strong armed the bank and forced them to report activity over a certain dollar amount to the IRS that way they could look into it when it came to the time of year when you're reporting your taxes. So if you withdraw or deposit more than $10,000 into your bank account in the United States that activity is being reported to the IRS. And if you were to be audited, they're gonna be bringing that up and they're gonna say okay, large sums of money went into your account or went out of your account. We wanna ask you why exactly that was? What were you doing with this money and are you paying taxes on it? Do you have any kind of illegal stuff going on in the background? And so that is something you have to understand as someone who uses a bank, your activity is being watched and in some cases it is being shared with the IRS. So anyways guys, I thought this was kind of an interesting video. We all take bank accounts for granted. I would say 99.9% of us have them but this is five things that a lot of people don't know about banks and I hope you guys found this to be interesting. So if you did, make sure you share this with one other person who might be interested in this as well, learning about how banks make money and some of the stuff that happens on the backend. And if you guys are not subscribed to my channel already make sure you subscribe. Hit that bell for notifications and drop a like down below. But thank you so much for watching this video. I hope you enjoyed it and I will see you in the next one.