Banks are an integral part of our financial system, but how do they actually make money? While keeping your savings secure and your payments running smoothly, banks also earn money through interest on loans and credit products. Banks have multiple revenue streams, and understanding these can help us better navigate our own financial decisions. In this guide, we’ll dive into the details and answer the age-old question of how banks make money. Keep reading to see how you can get personalized offers from our trusted partners through MoneyLion!
5 ways banks make money
Banks aren’t just vaults for your cash. They’re financial wizards turning money into more money using various strategies. Let’s break down their playbook.
1. Lending products
Banks are like the ultimate lending machines. They offer various loans to consumers and businesses and can profit significantly from the interest alone.
Mortgages
When you take out a mortgage to buy a house, the bank lends you the money and charges interest on that loan.
Over time, that interest adds up to a tidy sum. For a typical 30-year mortgage, the interest can be tens of thousands more than the original loan amount. It’s a slow but steady stream of revenue that banks gain.
Auto loans
Similar to mortgages, banks lend money for car purchases and earn through the interest paid over the loan term. The average auto loan is around five years, and while the sums involved are smaller than mortgages, the higher interest rates mean banks still make a pretty penny.
Personal loans
Need some extra cash for a big expense? Personal loans are your go-to; banks are happy to provide them, charging interest in exchange for lending funds to consumers. Personal loans are usually unsecured, meaning they don’t require collateral, but the trade-off is higher interest rates. It’s a win for banks who charge more to offset the risk.
MoneyLion helps you find personal loan offers based on your background and the info you provide. You can get matched with offers for up to $100,000 from top providers. You can compare rates, terms, and fees from different lenders and choose the best offer for you.
Commercial loans
Businesses often need capital for expansion, equipment, or other investments. Like personal loans for consumers, banks will also lend large sums to businesses and profit from the interest. Commercial loans can be massive, often in the millions, and come with complex terms that can be highly lucrative for the banks.
Credit cards
Credit cards are a major source of revenue for banks. Banks will charge interest on unpaid balances and sometimes hefty fees on top of that. Even if you pay off your balance in full each month, banks could still make money from merchant fees every time you swipe.
MoneyLion can help you explore various credit card options tailored to different needs and preferences.
2. Bank fees
Oh, the infamous bank fees! They may seem small but add up to big bucks for banks. Here’s how bank fees can hit your wallet and land in the bank.
Out-of-network ATM fees
Using an ATM that’s not in your bank’s network? Expect a fee, sometimes up to $5 per transaction.
Monthly maintenance fees
Some banks charge you just for having an account, typically ranging from $5 to $15 a month unless you meet certain conditions. These fees are steady revenue streams for banks.
Paper statement fees
Want your statement on paper instead of email? It’ll usually cost around $2 to $5 per statement. Banks use this fee to pay for their time to print and mail statements. They provide electronic statements as a fee-free option.
Overdraft fees
If you spend more than what’s in your account, you’ll pay a fee, often around $35 when you overdraft your account. Overdraft fees are among the most profitable bank charges, raking in billions annually across the industry.
Insufficient fund fees
Similar to overdraft fees, these are charged when a transaction is declined due to a lack of funds. These fees can add up quickly.
Inactivity fees
Haven’t used your account in a while? Some banks will charge a fee for that, too!
Account closing fees
You might be charged a fee if you close your account too soon after opening. Banks charge fees to help cover operating expenses, administrative costs, and make a profit.
Wire transfer fees
Transferring money internationally? That’ll often cost you $15 to $30 per transfer. These fees cover the cost of the transaction but also add a nice profit margin for the banks.
3. Financial advisory services
Banks also make money by offering financial advisory services. They may charge fees for managing your investments and providing financial planning advice.
It’s a win-win — they earn fees, and you get financial advice to help grow your funds.
Advisory services can include everything from retirement planning to estate management, and the fees can be substantial, often a percentage of the assets under management.
4. Capital market services
In the world of big finance, banks play a crucial role in capital markets. They help companies raise money by issuing stocks and bonds and earn hefty service fees. It’s a high-stakes game, but the rewards are massive.
Investment banks, in particular, thrive on these activities. They advise on mergers and acquisitions, underwrite new debt and equity issues, and trade securities.
5. Investments
Banks don’t just sit on the money you deposit, they may be able to invest their own money.
Banks have teams dedicated to finding the best investment opportunities, minimizing the risks to help ensure they get a solid return on the funds you deposit.
Making sense of bank profits
Banks are multifaceted money making machines. From lending products to investment services, they have numerous streams of income. Understanding these mechanisms allows you to better navigate the financial world and make savvy decisions.
FAQ
How do banks make money from checking accounts?
Banks make money from checking accounts primarily through monthly maintenance, overdraft, and ATM fees. They also use the funds deposited in checking accounts to invest and earn returns.
How do banks make money on high-yield savings accounts?
High-yield savings accounts offer better interest rates to customers, but banks still make money by lending out these deposits at higher interest rates or investing them in profitable ventures.
How do banks make money from certificates of deposit (CDs)?
Banks earn from CDs by lending the deposited funds at higher interest rates than they pay CD holders. This interest rate differential is their profit margin.
