Banks are an integral part of the world economy. Since the existence of money, we use them to store our excess money and to borrow in times of need. Everything looks perfect, but did you know that banks actually keep many secrets from us? In this article, we’ll reveal five hidden truths about money that no banker will tell us because they would prefer we remain in the darkness and they profit from our unawareness.
1: Money in the Bank Makes You Poor
We’ve all heard the saying “money in the bank is like a money tree in the backyard.” While the saying is true in some sense, it doesn’t give us the whole picture. Keeping money in a bank account is definitely better than keeping it hidden under your mattress. The biggest incentive behind keeping money in the bank is that the bank pays you interest, so our common sense says that our money in the bank will grow because of this interest. But that doesn’t actually happen.
To understand this, we need to understand the concept of purchasing power parity. Back in the 1990s, a Big Mac from McDonald’s could be bought for around three dollars, but today the same Big Mac costs $5.80. That’s almost double, so the value of your three dollars in burger terms has definitely reduced. Similarly, we can see that everything has become more expensive since the time of our parents’ generation. This price rise is known as inflation.
Let’s assume that the inflation rate is somewhere around four to five percent. Your savings bank account’s interest rate should be at least the same as this so you can afford the same things you could afford ten years back with the same amount of money. But you also know that’s not true. Gas is pricier, so is milk, and so is everything else. You also know what expenses you’ve cut down in the last ten years just to survive on your paycheck, and that proves your money in the bank is not growing at the same rate as inflation.
On the face of it, banks generally give you a three percent interest rate. However, if you do the math, you are actually getting a negative one percent interest rate because inflation is at four percent. So leaving money idle in banks is never a good idea if you want to maintain your current lifestyle.
Instead, keeping money invested in assets that rise exponentially with inflation is a great way of storing your wealth. Some great options can be stocks, real estate, and even government securities if you want safer investments.
2: Your Account Balance is a Sham
Don’t we all check our bank account balance all the time? Yes, we do. It gives us the peace of mind that no matter what happens, we will have at least as much money as our account balance shows. But that’s not always the case. Your account may not always let you withdraw all the money in it.
The reason behind this is called the fractional reserve system. Under this system, every bank is allowed to lend out all the money they have in their deposits after setting aside a fraction of it as reserves. The reserve ratio is dictated by the central bank of the country, which is the Federal Reserve in the U.S. After keeping the required reserve amount aside, banks lend out the rest at a rate higher than what they pay you. The difference between the lending rate and the deposit rate is their profit.
How Money is Created Out of Thin Air
Let’s look at some numbers. Suppose you deposit one thousand dollars in your account. The reserve ratio is ten percent, so the bank can lend out ninety percent of your one thousand dollars to loan seekers. But this is not where it ends. When your bank lends someone nine hundred dollars, it gets deposited in the loan seeker’s bank account. This second bank again reserves ten percent and lends out ninety percent to someone else, which is eight hundred ten dollars. This cycle continues.
Do you know how much money is created out of one thousand dollars when the reserve ratio is ten percent? The answer lies in your grade eight math book. This is a standard infinite geometric progression problem. In simple words, the total money generated from one thousand dollars is one thousand divided by 0.10 equals ten thousand dollars. Yes, this is money created out of thin air.
Are you wondering why banks can do this? Well, the answer is simple. Banks operate on an assumption that not all depositors will withdraw all their money at the same time. Because of this very basic yet true assumption, banks are able to maintain their liquidity without going bankrupt. They still let depositors withdraw money and along with that, they make a profit too.
What Happens When Everyone Wants Their Money
But can you imagine what will happen if all the depositors try withdrawing all their money at the same time? The world economy will collapse due to bank failure. A real world example of this was the 2008 financial crisis when depositors were running helter-skelter to withdraw their own money. Due to too many withdrawal requests, close to twenty-five banks collapsed in the U.S. itself in 2008.
The same happened very recently in 2023 when overwhelmed depositors of Signature Bank made a sudden withdrawal of ten billion dollars. This deposit exodus came as an aftershock of the sudden collapse of Silicon Valley Bank, making it the third biggest bank failure in U.S. history. Ultimately, the regulators had to take over the bank under their protection to bring back financial stability and reinstate people’s faith in the economy.
3: Low Risk Means a Low Borrowing Rate
While average middle-class people borrow money when they don’t have money, the wealthy borrow money despite having money. The biggest reason why the wealthy borrow is because the richer you get, the cheaper the loan gets. Even though this may seem counter-intuitive to average people, it makes a lot of sense to banks.
Banks lend money based on two factors: profit and risk. While profit is always the most important motive for any company including banks, risk is even more important when it comes to lending money. If you are an average American already buried in huge credit card debt, there is a higher risk of you defaulting on a bank loan. To compensate for such higher risk, the banks will offer you a loan at a much higher rate.
On the other hand, someone like Mark Zuckerberg can get the same loan for much lower. Naturally, the risk of lending to Mr. Zuckerberg is almost negligible compared to lending money to any average American.
The Zuckerberg Example
This is exactly what happened when Mr. Zuckerberg went to take out a home loan in 2012. While the average mortgage rate was 2.69 percent, Mr. Zuckerberg got it only for 1.05 percent. That’s a rate difference of 2.69 minus 1.05 equals 1.64 percent.
While a rate difference of just 1.64 may not seem much in percentage terms, in money terms this created a sizable difference. Zuckerberg borrowed 5.95 million dollars, so the rate difference of 1.64 meant $96,580 less interest for Zuckerberg. That’s almost $100,000 every year over his 30-year home loan, or you can say his loan was three million dollars cheaper even without the compounding effect.
4: Debt is Free Money for the Rich
Another reason why the rich borrow despite having enough spare cash is because debt has several other benefits too. Continuing with the story of Mr. Zuckerberg’s loan, we can show you how you can use debt to your benefit.
As we all know, Zuckerberg with a net worth of 15.7 billion at that time didn’t even need that loan, but he still borrowed. The hidden truth behind this was that he knew by simply putting such money in an index fund at eight percent, he would earn close to seven percent in interest—a return much higher than the 1.05 percent he owed the bank.
On top of that, using this loan for tax breaks, Zuckerberg saved even more money by paying lesser taxes. So if you are smart like Zuckerberg about your debt, you can easily convert your debt into free cash.
If you want to learn more about leveraging your debt, you should definitely read Robert Kiyosaki’s best-selling book “Rich Dad Poor Dad.”
5: Credit Cards are a Boon for the Banks
If you think bank representatives are your friends, you couldn’t be more mistaken. When bank sales reps try to sell you a credit card or any other product, they don’t take into account your needs. They are only concerned about meeting their monthly targets, and if they are being over friendly to you, you should see that as a big red flag.
Credit cards are the biggest boon for banks, but at the same time, they are the biggest bane for you. There are several reasons for that.
High Interest Rates
The first and most obvious one is that unlike all other debt products, credit cards have one of the highest possible interest rates. It can even go up to twenty percent in some cases. If you shop within your means and pay your debt on time, then you don’t need to worry about it. However, very few cardholders belong to this category.
A survey by LendingTree shows that as of 2023, Americans have a mountain of credit card debt in front of them amounting to 986 billion dollars. Out of all of the credit card holders, sixty-five percent don’t pay their debt in full each month.
The biggest problem with credit cards is that it delays you from paying for what you buy. This removes the affordability check from our minds. We start spending without knowing how we will pay off our debt. That’s how the debt spiral starts.
Hidden Processing Fees
The second but much more subtle problem with credit cards is the processing fee. This is not the annual charges charged by the bank. Instead, it is the extra you pay every time you make a purchase. Banks charge sellers and shopkeepers a processing fee every time a customer pays using a credit card, and this can go as high as fifteen percent.
If merchants start paying this out of their own pockets, most of them will go into losses, so they pass it on to the customers by increasing the product prices. Therefore, a one hundred dollar purchase includes this fifteen percent processing fee, which you would never know unless you ask the shopkeeper.
Rate Increases Without Your Consent
Finally, the third problem with credit cards is that the banks can increase the interest rates by just giving you a fifteen to thirty day notice, after which it is deemed accepted. If you are like most people, you would never look into the fine print of these bank documents to decide whether you still want to continue with a credit card or not.
The Bigger Picture: Understanding Banking’s Hidden Agenda
These five truths about money reveal a fundamental reality about the banking industry: while banks position themselves as helpful financial partners, their primary goal is profit maximization, often at the expense of their customers’ financial well-being.
The fractional reserve system allows banks to create money from nothing and charge interest on it. The inflation game ensures that your savings lose purchasing power while the bank profits from the spread between what they pay you and what they charge borrowers. The risk-based lending system creates a two-tiered financial world where the wealthy get cheaper access to capital while average people pay premium rates.
Credit cards represent perhaps the most predatory aspect of modern banking, designed to encourage spending beyond means while extracting maximum fees and interest from consumers who fall into debt traps.
Understanding these truths about money doesn’t mean you should avoid banks entirely, they remain necessary for many financial transactions. However, being aware of these realities allows you to make more informed decisions about how you store, grow, and borrow money.
The key is to minimize your exposure to the negative aspects of banking while maximizing the benefits. This means keeping minimal cash in low-interest accounts, investing in inflation-beating assets, using credit responsibly, and understanding that the banking system is designed to benefit the institution first and the customer second.
By knowing these hidden truths about money, you can better navigate the financial landscape and make decisions that serve your long-term wealth-building goals rather than simply enriching your bank.