The Banking Function Explained

If you take one idea away from the Infinite Banking Concept, let it be this: banking is a function, not a place.

It’s not the building on the corner with the marble floors. It’s not a checking account or a savings account. Banking is the movement of money — loans, deposits, repayments, interest. Money must flow, just like blood must flow, just like water must flow. And the question that Nelson Nash spent his career asking is devastatingly simple:

How much of that flow do you control?

Everyone Is Already in the Banking Business

Here’s what most people miss: you are already participating in the banking system. Every time you make a car payment, pay a mortgage, finance a piece of equipment, or even pay cash for a major purchase — banking is happening. The only question is who profits from it.

When you borrow from a bank, you pay them interest. That’s obvious. But what about when you pay cash? Most people assume paying cash means “no cost.” Nash saw it differently. When you spend cash, you give up the interest that money could have earned had you kept it working somewhere. Either way, there is a cost. Economists call this opportunity cost. Nash called it the economic problem that nobody talks about.

This is what he meant when he wrote: “You finance everything you buy — either by paying interest to someone else, or by losing interest you could have earned. There are no exceptions.”

The typical American family, Nash calculated, loses 34.5 cents of every dollar to third-party lenders through the course of their lifetime — mortgages, car loans, student debt, credit cards. Meanwhile, the financial industry tells them to obsess over earning 8–12% on the tiny 5–10% they manage to save.

Think about that. We’re fighting for basis points on savings while hemorrhaging dollars on financing. It’s like trying to fill a bathtub with the drain wide open.

The Grocery Store Analogy

Nash used a brilliant analogy to illustrate how banking works — and how most people get it wrong. He asked readers to imagine running a family grocery store.

You build the store. You stock the shelves. You hire help. You provide a good service. The business is profitable. Then Nash poses a question:

Where does your wife shop?

If she shops at her own store — going through the front door and paying at the register like any other customer — the business thrives. The revenue stays in the family. The profits compound. The store can expand.

But what if she goes in the back door and takes groceries without paying? Nash’s example uses a can of peas. On the surface, it seems like a small thing — one can of peas. But the grocery business operates on razor-thin margins, roughly 2% profit. To break even after that one stolen can, the store owner must sell that same can of peas 17 or 18 more times just to recover the lost turnover.

This is the concept of volume of business. It’s not about the profit on any single transaction. It’s about the cumulative effect of capital flowing honestly through the system, turning over again and again.

Nash’s point is direct: your personal finances work the same way. If you “steal” from your own banking system — by failing to repay policy loans, by under-capitalizing your system, by being a dishonest banker to yourself — you don’t just lose that one transaction. You lose the compounding effect of every future transaction that money would have generated.

Volume of Business Beats Rate of Return

This is where Nash’s thinking diverges most sharply from conventional financial wisdom.

The financial industry is obsessed with rate of return — finding the next hot stock, the best-performing mutual fund, the optimal asset allocation. Nash was obsessed with something entirely different: the volume of money flowing through your life and who captures the interest on it.

Consider his airplane analogy. A small plane flies at 100 mph — that represents your savings rate, roughly 10% of income. But the plane is heading into a 345 mph headwind — that represents the 34.5% of every dollar lost to third-party lenders. The plane is going backward at 245 mph.

Now flip it. Turn the headwind into a tailwind. The plane is doing 100 mph plus 345 mph of wind at its back — that’s 445 mph forward. The difference between the two scenarios? 690 miles per hour.

Not because you got a better rate of return. Not because you found a clever investment. Because you changed who controls the environment in which your money moves.

Who Captures the Interest?

Every financial transaction in your life has a financing component. Every single one. The question is always: who gets paid?

When you finance a car through a dealership, the finance company profits. When you take out a mortgage, the bank profits. When you charge a vacation to a credit card, the credit card company profits. These institutions understand the banking function. They’ve built entire empires on it.

But here’s what Nash discovered: you can capture that same function. Not by starting a bank — that requires a charter, regulators, depositors, buildings, compliance officers, and millions in capital. Instead, by using a dividend-paying whole life insurance policy from a mutual company, you tap into an existing institution that already has all the infrastructure, while positioning yourself as owner, depositor, and preferred borrower all at once.

When you borrow from your policy, you’re paying interest to a company you own (as a policyholder of a mutual company). The profits come back to you as dividends. When you pay yourself back at the market rate of interest, the spread between what the insurance company charges and what you repay goes directly back into your system.

This is economic value added — a concept Nash found so important he dedicated an entire section to it. Most people don’t even assign a cost to their own capital. They think paying cash is “free.” Nash taught that if you don’t value your own capital enough to charge yourself interest on it, you’ll never build real wealth.

Capitalization: The Neglected Principle

Nash’s four fundamentals of IBC are:

1. Think long-range.
2. Don’t be afraid to capitalize.
3. Don’t steal the peas — practice honest banking.
4. Don’t do business with banks (for lending or financing large purchases).

Of these, capitalization is the one most people struggle with. We live in a culture that celebrates spending and consumption. The idea of aggressively funding a system before you need it feels counterintuitive. But Nash hammered this point relentlessly — the word “capital” appears over 70 times in Part I of his book alone.

Ryan Griggs, a practitioner and educator who studied Nash’s work extensively, puts it this way: “It is not the case that investments attract capital. Rather, capital attracts investment — and capital attracts all kinds of opportunity.” If you build a pool of cash that you have access to and control over, opportunity will hunt you down. You won’t need to chase returns. You’ll be positioned to evaluate opportunities from a position of strength, because you know your cost of capital and can compare it to anything that comes your way.

The Bottom Line

Banking is not something that happens to you at a building with a drive-through window. Banking is a function that occurs in your life every single day — in every purchase, every payment, every financing decision.

The question Nelson Nash asked — and answered — is whether you’ll be on the paying side or the receiving side of that function. The grocery store analogy, the airplane analogy, the concept of volume over rate — they all point to the same truth:

Control the banking function, and you control your financial destiny.

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This article is for educational purposes only. IBC Academy does not sell financial products or provide financial advice.