How Do Banks Earn Money (And A Lot of It)?
- Steve Cage
- Feb, 19
Banks act as safe depositors, lenders and even guardians of your money. When you deposit money with a bank, you expect it to keep the money safe for you. Have you ever thought how banks earn money? After all, it couldn’t be meagre $10 fee on your accounts that could be running huge corporations like banks, isn’t it?
Fees and other charges
These are the most obvious ways in which you are paying the banks. You could be paying minimum account balance fee. Though this kind of fee were not very common earlier, they have become very commonplace these days.
Banks can also charge a fee for using ATMs (even for getting new cards and replacing old cards). Apart from this, you could also be paying fees for paper statements of your account, early withdrawals from your CD and penalties for late payment of loans or prepayment of the loans. You could also end up paying a fee for not using your account actively.
Payment processing charges are also very common with banks. If you are doing wire transfers, online transactions etc. the bank charges you this fee.
The banks may also charge their customers service fee for optional services. This may include fees for credit cards and debit cards known as swipe fees. You could also be charged for money orders or for issuing checks. Finally, the banks may charge you fee for wealth management, if it provides you this kind of services too.
When you deposit your money into a bank savings account, the bank will provide you rate of interest on your saving. This could be as low as 1%. In fact, no interest is provided on checking banks. Your money is then utilized by the banks to provide loans to different individuals and merchants. The rate of interest charged on these loans could be as high as 4%. The 3% difference in these two numbers is known as the bank’s spread. This is what the bank earns by depositing your money and lending it to others.
Credit card loans
Though credit card debts are technically classified as debt, they are much different. This is because credit card debts carry a rate of interest plus an additional APR fee. This leads to higher income for the banks but extra burden on the debtors.
The banks can invest your money in several financial instruments, as they deem suitable. There are many rules and regulations about the kind of investments the banks can participate in. However, the general tendency of banks is to opt for higher risks, to get higher returns. Regulations are deemed to change with time because of which the banks keep changing their investment routes.
These are a few ways in which banks earn their income. This money is then used to maintain the bank’s technology, pay to its employees and make other payments, wherever necessary. A bank’s income always comes at your expense. So, make sure you choose only those banks that offer you the most reasonable fee possible.