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Understanding How Banks Make Money

By Jackie Lam

  • UPDATED July 09
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  • 7 MINUTE READ

Banks play a crucial role in keeping our money safe, earning interest, and giving out loans. It's important for everyone, from individual customers to large enterprises, to know how banks actually make their money. Here are the different ways banks make money, especially through fees, with useful tips on how to reduce banking costs to get the most out of your money dealings.

Understanding Bank Fees

Banks make much of their money through various fees:

  • • Monthly Maintenance Fee: The costs can vary; some banks don’t charge this fee under certain conditions.
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  • • Out-of-Network ATM Fees: You pay these fees when you use ATMs not in your bank’s network; again, some banks don’t charge for this.
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  • • Overdraft Fees: These are fees you pay when you don’t have enough money in your account; you can choose to have overdraft protection to help manage these costs.
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  • • Insufficient Funds Fee (NSF): This fee is charged when you spend more than what you have in your account; some banks are lowering these fees.
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  • • Paper Statement Fees: These are fees for getting paper statements; you can avoid these fees by choosing online statements.
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  • • Inactive Account Fees: These are charged on accounts that haven’t been used for a while.
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  • • Account Closing Fees: These are fees for closing your account too soon after opening it; this might also include penalties if you take your money out early.

Making Money from Loans

Interest from loans is another significant way banks make money. They earn a lot from interest on different kinds of loans like personal, home, car, and small business loans. The interest rates on these loans are usually higher than what the banks offer on deposits, which allows banks to earn more money.

Earning from Credit Cards

Credit cards are another large revenue stream for banks, through interest and fees like those for late payments, going over your limit, and using your card in other countries. Banks also make money from fees they charge stores when you pay with your credit card.

Charging for Financial Advice

Banks can also make money by providing paid financial advice, helping with things like managing wealth, planning investments, and figuring out retirement. They might charge a percentage of the money they manage, a flat fee, or an hourly rate.

Investing Deposits

Banks use the money deposited by their customers to invest in different assets, which is a key part of how they make money.

So How Profitable Are Banks?

According to the FDIC, banks in the U.S. made $279.1 billion in 2021, reflecting how much money these different offerings generate.

Different Types of Banks

  • • Commercial Banking: Deals with deposits, loans, and basic financial services for individuals and businesses. Here, commercial banks mainly make money from interest on loans and various fees.
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  • • Investment Banking: Handles complex financial deals like mergers, buying other companies, and selling stocks. Here, investment banking plays an active role in financial markets for the chance at high earnings. Investment banks mainly make money from fees for these services, including advice and transaction fees.

 

Jackie Lam is an L.A.-based money writer whose work has appeared in Salon.com, CNET, Refinery29, Business Insider, and BuzzFeed, among others.

 

READ MORE: The ABC's of Banking: What is a Bank and How Does it Work?