How Do Banks Make Money?

How Do Banks Make Money?


Have you ever wondered how your bank makes money? After all, they give you a checking account for free, and they give you interest on all the money you let sit in your savings account, and your certificate of deposit. So, if the bank is giving you money just to continue being their customer, how are they still in business?

Well, it’s pretty simple, actually.

Lending, And Interest

If you belong to a retail bank (which is the most common kind of bank for people who just want a checking and a savings account), then you are how that bank makes money. When you give your bank your money, it turns around and loans money to other people. These loans are typically for mortgages and businesses, and the people taking out those loans have to pay it back with interest. Additionally, many banks offer credit card services, and those credit card balances will also have interest charged on them. When people make payments, the bank makes a profit, and it uses some of that profit to pay off the interest it owes those with savings accounts, money market accounts, etc.

Now, that sounds risky. After all, what happens if someone defaults on their loan, and can’t pay back the bank? While there’s no denying that does happen, banks do their best to screen and evaluate people they give loans to. So, while there is no such thing as a guarantee when it comes to giving out loans, the people a bank does business with are those with a good track record, credit score, and who present the lowest possible risk. That way the bank can continue making money, while making sure everyone who banks with them stays happy.

Fees

The other common strategy that banks use to make money is to charge their customers fees. If you’ve ever tried to charge more than you currently have in your checking account, then you may think you know all about fees. However, you’ve only seen the tip of the iceberg.

There is a huge variety of fees at any given bank. There are overdraft fees when you charge too much, but there are also application fees you have to pay when you apply for a loan, processing fees when you use services like sending a wire transfer, and there may even be fees for opening and closing accounts. Additionally, for banks that require a minimum balance in certain accounts, there’s a fee for dipping below that amount.

None of these fees are gigantic, as a rule. However, if a bank has thousands of customers, and they charge a few dollars in fees here, and a few dollars in fees there, then that is a relatively steady income for the bank. Even if the fees are relatively minor, if the bank gets that fee from a majority of its customers, then that can be more than enough to cover its expenses.

Banks Got To Get Paid, Too

No one likes paying fees, and even fewer people like paying interest, but it’s important to realize that banks are not charity organizations; they’re businesses, out to make money. However, banks also need customers in order to make that money, so it becomes a give-and-take scenario. If a bank depends more on loans than on fees, for instance, then it might advertise it offers no-fee accounts in order to draw more customers, so that it has more capital to use for loan purposes. Because, at the end of the day, a bank with no customers is an organization that will not be in business for much longer.