Cash, Bank Deposits, and Interest Rates

Abstract

Before even beginning to look at buying a stock, bond, or building, an investor is likely to start by depositing money in a bank account. Bank deposits are not so much an investment themselves but rather a convenient place to store money and a platform for using the bank’s services to transfer some of that money to other accounts. Usually, a depositor would have to pay a company for storage and other services to take care of personal belongings and valuables, but banks are allowed to invest the money deposited with them into bonds and loans (described in the next chapter), passing on part of the interest from those investments to the customer and keeping the rest as their service fee (rather having to charge direct fees for all of their services). As of 2017, banks and bank deposits are still the main way money moves around from business to business worldwide, and in fast-growing, recently poor countries like China, many first-generation bank customers are switching from banknotes and paper checks to paperless payment systems that move money electronically between bank accounts (like Alipay and WeChat Pay). Over the next decade, there is likely to be a rise in “e-cash” transactions using cryptocurrencies and blockchain technology (described in Chap. 9) and replacing the need for banks to serve as fee-taking and risk-taking intermediaries for the basic functions of storing and transferring money.