If you have a bank account or are thinking of opening one, you might have wondered; how do banks make money?
You might also just be curious at how the banking industry works.
When you hear how banks are making profits, sometimes astronomical profit figure, you cannot help but wonder about how banks actually make money.
At the core of the products or services your bank provides, it is important to remember that banks are businesses.
They are institutions seeking to make money and turn a profit from their banking activities. You cannot really begrudge them on this.
A bank makes money, and sometime they even make loses leading to bankruptcies. History is laden with banks that did not make money and went bust.
Understanding how banks make money is one way to deepen your financial knowledge. This will or could help you manage your personal finances better.
It can be a factor when you are making a decision of where to open a bank account, save money or borrow money for personal or business use.
That is why this article on how banks make money is important to you. it is your ultimate guide on the banking business model.
By the end of reading this, you will have a better understanding of how your bank make money or the profits you read about in the news.
Grab your cup of coffee, or glass of wine and let us dive into this.
How Do Banks Make Money?
Banks make money mainly from interest and non-interest sources.
The way a bank makes money can further be divided into the following categories;
- Interest on Debt
- Penalties and Charges
- Banking Fees
- Interchange Fees
- Investment Income
If you think about it, the interest and fees your bank make from loans or debt is a big source of their income.
You also have non-interest ways for a bank to make money.
Let us now look into how banks and financial institutions make money.
Understanding how banks make money can actually help you manage your personal finances better.
You will be able to try and avoid unnecessary banking transactions. In turn, this will help you reduce the banking fees you incur.
Of course, that is not good for the bank given that banking fees and charges is one of the way a bank makes money.
As you have learned today, banks make most of their money from lending activities.
Loans issued to individuals or businesses generate interest income to the bank.
This applies to online banks as well. While they might offer free accounts, the bank will make money from your deposits.
I hope you now understand how banks or financial institutions make money.
Use this information to manage your finances better, and improve your knowledge on how the banking industry works.