Banks are just like regular businesses. The only difference between other businesses and banks is the fact the banks trade money while others trade products and services. But most people fail to understand how banks make money because if they are lending money, then how are they making money at the same time?

The thing about banks is that they offer a wide range of services related to money. They act as your money caretakers, whereas they also act as your loan providers in some cases. In both ways, they make a lot of money that you most probably don’t know about.

Banks offer a number of financial products and services to their customers and clients. They either make money by providing you with the deposit services or they charge you interest on the loans, mortgage plans or other financial product.

You will be surprised to find out that banks on their own don’t really have any money when they start the business. Their business is all about taking money from you and giving it to someone else. They just act as a trustworthy middle agent who takes a cut for himself for getting the deal done between two parties. Unlike regular agents in the case of banks, you don’t know about the other party. You deal directly with the bank and they do the rest for you.

Bank Deposit Services

One of the basic ways in which banks make money is acting a safe keeper for the depositors. Almost everyone has a bank account nowadays because banks have built a reputation for keeping your money safe and secure. Since they are providing a service, thus they aren’t going to do it for free. So banks charge a specific bank fee for every service that they offer. The most common bank fees that you have to pay to your bank are;

1. Monthly Account Maintenance Fees

Do you think your account needs maintenance? Well, it doesn’t matter what you think because banks are going to charge you a fee for it whether you like it or not. On average, you pay around $156 annually for maintenance. Like seriously, how much maintenance could a bank account need?

2. Minimum Balance Fees

Always read the SignUp form before opening an account. You might not know about it, but every time your balance follows below the limit you are charged a something called the Minimum Balance Fees. So it is better to know about your minimum requirement so that you can avoid making unnecessary bank fees.

3. Paper Statement Fees

Don’t know whether banks do it to save paper or just to make money. Who charges a few dollars just to print a page or two? Your bank does! Every time you request a printed bank statement you will be charged around$1-$5 which is totally unnecessary but for banks, every penny counts.

4. ATM Fees

You are charged an ATM fee every time you withdraw money from an ATM outside your area of the network. Banks are interconnected and yes, they do collaborate with one another to get more fees out of you, at least that is what everyone thinks.

5. Debit Card Transaction Fees

Debit cards don’t work like credit cards and most people don’t understand that. Every time you use your debit card to make a transaction, you are charged around $1. Imagine thousands of bank clients making debit card transactions in a day? How much do you think banks earn from just a dollar?

6. Wire Transfer Fees

Imagine how smart the banks are? They provide you with the wire transfer service which for them is like changing the cells of the excel sheet of two individuals that’s it. But even it is just software doing its job; banks charge both the sender and the receiver a certain percentage of the total amount as a fee.

Although there are a number of other ways in which banks charge the depositors a fee, these are the most common charges that everyone has to pay whether they use the service or not. Other than these the rest of the bank fees are charged based on the services that you avail.

Loans and Mortgage Plans

The most common way in which banks make a huge sum of money and also risk their money is by providing loans to the people in need. Along with banks, there are other credit institutions as well that provide the same service, but the public tends to trust the banks more even if they charge a huge rate of interest.

Banks offer a countless variety of financing options or loans you may call them. The types of loans and the size of the loans depend on the number of people willing to borrow some money and the number of funds that the bank has to offer to such individuals. That is also how your bank decides the rate of interest along with other factors of course.

When it comes to acquiring a loan from the bank either for financing a car, mortgaging a house or running a small business, there are two attributes that tend to vary for different types of loans;

  • The Loan Term
  • The Security

You can get your hands on a short term or long term loans, term financing options for your property, personal loans and of course working capital credit for cash-based businesses. But every time you get a loan from the bank, you will be charged a certain amount of interest, based on the interest rate that the bank has in place.

Now the thing about loans is that banks don’t use their own money to offer you those loans. You might not know about this, but that money belongs to individuals who have a savings account in the same bank. Banks offer those individuals with a lower interest rate (They make the money in this case) and set a higher interest rate with you (You pay the money). The difference between the interest rates is the amount of profit that the banks make, smart right?

Well, it seems quite easy when you break it down like that, but the issue is that banks don’t agree to pay just anyone. There are certain requirements that you have to fulfill because you qualify for the loan. Some of them are;

  • A good credit score
  • Something to offer as security
  • Initial deposit (in some cases only)
  • Annual revenue/ Bank statements
  • Net operating income

Of course, they are going to keep something of yours in case you default. Plus, they are going to check for your credit score and annual income to make sure that you would be able to pay back the loaned amount. They are a business, not your fairy godmother!

Bottom Line

Banks are the backbone of a country’s economy. It’s a business, not a charity. No matter how much the public dislikes paying the extra bank charges and the high-interest rates, they are essential for the banks because they also have bills to pay. Banks do make huge profits, but at the same time, they also take risks with you by offering millions of dollars’ worth of loans collectively. So whether you like it or not, you will have to continue paying the charges and the interests and the banks will continue to make money out of you because that is exactly how every business works. You pay, they make the money!

HEATHER TRICE

Heather Trice, Co-founder and Master of The Ring is an asset to the Foundation Auctioneers. Her inner energy and sharp dedication to the business drives her to excellence. She is the go to person at Foundation Auctioneers thus you can for sure rely on her to use her charismatic influence to lighten up any event. She’s a team player, a true professional and has a heart of gold.
Heather Trice final - How Do Banks Make Money? How Do Banks Work?