What is a bank: from the money changer's table to the mobile app, and the broken bench in the word «bankrot» (bankrupt)

Nodira kept her spare money at home. Her neighbour Akmal, meanwhile, was looking for a loan to open a shop. They do not know each other, and even if they did, they would not trust each other: Nodira is afraid her money might not come back. They need an intermediary in the middle whom both trust. The name of this intermediary is bank.

What is a bank?

A bank is a financial organisation that accepts money from people and businesses, lends part of this money to others and makes payments. Remember its three main activities:

• Deposit (savings): Nodira puts her money in the bank, and the bank pays her the agreed interest.
• Credit: Akmal borrows from the bank and repays it with interest.
• Payments: cards, transfers, utility payments and settlements between businesses go through the bank.

How does a bank earn money? One of its main sources is simple arithmetic: the interest it charges on loans is higher than the interest it pays on deposits. The difference covers the bank's expenses and brings a profit. At the same time, the bank also takes on the risk that a loan will not be repaid, so before lending it checks the borrower carefully.

Where does the word come from?

According to the Online Etymology Dictionary, the word "bank" in the sense of a financial institution is recorded from the late 15th century and originally meant the counter or shop of a money-dealer, that is, of someone who did business with money. It comes from Old Italian banca and French banque, both meaning "table". These in turn go back to a Germanic word meaning "bench" (for example, Old High German bank).

So the beginning of banking is a simple scene: a merchant sitting at a table set up in the market, changing coins and keeping money.

Bonus word: bankrupt (Uzbek «bankrot»). According to the same dictionary, the English "bankrupt" is recorded from the 1560s and comes from the Italian expression banca rotta "broken bench". There is a story that it was the custom to break the bench of a money-dealer who could not pay his debts, but the dictionary notes that the allusion is probably more figurative.

Why it is needed: its function and purpose

The main function of a bank: to gather idle money and deliver it to those who need it (intermediation), and to make payments quickly and safely. For an ordinary person and a business this provides the following:

1. To keep money safe. Money in an account instead of cash at home that could be lost or stolen.
2. To grow savings. A deposit lets money earn interest instead of sitting idle.
3. To start and expand a business. People like Akmal obtain a shop, equipment or raw materials through credit.
4. To speed up settlements. A card or a mobile app delivers money to a person in another city in a few seconds.

Who it works with and who contributed

Every business's accountant works with the bank: making payments from the account, reconciling the bank statement with the accounting records, recording loans and interest. Banks themselves are supervised by the central bank.

To read the history of banking step by step: «Banking history: why did the first "bank" appear in a temple?», «Banking history: how did the Medici Bank and the bill of exchange work?» and «Banking history: from the ATM to the mobile app». The links are at the end of the page.

In the next lesson

In the second lesson we will look at a simple example of what a bank account is and how money "travels" from one account to another.