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If you use a bank, it’s natural to ask, “How does a bank make money?” since it can seem like a free service.
Commercial banks offer plenty of benefits to businesses and the public but still need ways to profit. If they don’t, it would make sense that the bank would need to close.
Banks make most of their money from various fees and service charges. These fees come in maintenance fees, late fees, mortgage payments, or overdraft fees. Banks can also make money from collecting interest on various loans. Credit cards provide them with several forms of fees.
When you use a bank, you’re helping them out financially, even if you don’t have loans with them or pay hefty service charges. In this article, I’ll cover all of the ways a bank can turn a profit. Let’s get started!
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How Do Banks Make A Profit?
There are several ways banks can make money, but the most significant source of funds for them comes from the interest they receive from loans. However, you might also pay to use ATM services, credit card fees, and more.
These small changes add up for the bank since thousands of people use them each day.
Overall, there are many different ways that banks can turn a profit. You’ve been paying for various services, maybe without even realizing it. Let’s now talk about the other ways banks can earn an income.
If you’re keeping money in your bank accounts, you’re helping the bank earn interest. The bank then takes those funds and uses them to make loans with their other patrons.
From there, the banks charge interest on these loans.
You get a small amount of interest from savings accounts, although the bank makes more in the interest they have on loans. So, even though you receive some money, the bank still turns a good profit on debt interest.
Banks can earn a lot of money on interest.
These institutions can afford to give you spare change in monthly interest because they make millions off investing your money and receiving interest.
This YouTube video covers this in more detail and explains precisely how banks work:
There are several fees associated with bank accounts. However, these fees are often necessary for the bank to grow.
They can include any of the following:
- Overdraft charges
- Account maintenance fees
- Inactivity fees
- Excessive withdrawal from savings accounts charges
- Wire transfer fees
- Paper statement charges
- Debit card replacements
- ATM fees
- Minimum balance fees
- Penalties for bad checks
When you use your debit or credit card, the bank charges the store a transaction fee to process the purchase. The store takes the payment from the cost of your bill, so you don’t end up paying anything extra.
Many small stores have minimum purchase requirements because they need to cover the interchange fees while still turning a profit. Since many people swipe their cards daily, banks make a good profit from collecting interchange fees.
Banks use a method known as the spread to earn money. They take the money you deposit and put it to work to make higher profits. The bank invests the money they receive in savings accounts and CDs to earn money.
This amount is always much more than what you get in interest every month.
The spread is the difference between how much the bank pays you in interest and how much they earn. These profits make the bank a lot of money over time, which they can then use for loans and other purposes.
While the bank invests your money, your earnings are 100% safe. You don’t need to worry about losing your money. Most bank accounts are FDIC-insured today, meaning you won’t have a loss if the bank’s investments fall through.
How to Avoid Paying Bank Fees
While there are many fees and charges associated with banks, you’ll want to make sure you avoid them.
Over-drafting your account too often or paying too much for monthly maintenance can add up over time. As part of managing your finances, you want to make sure you avoid as many fees as possible.
Even if you do this, the bank will still make a ton of money. Take a look at some tips you can use to reduce the amount you pay to use your banking.
If you often find yourself at an ATM, you could be paying each time to use it. The price to use ATMs outside of your bank rises each year. However, it’s pretty easy to avoid.
Consider what other options you have.
Checks and debit cards are usually a better idea. If the place you’re shopping at only takes cash, you want to look online for ATMs connected with your bank. Many bank apps show you exactly where you can find them.
When you find yourself in a pinch for cash, you can use your debit card or check, then ask for money back at a store. Most places won’t charge you anything to receive a small amount of cash.
Or, if your bank doesn’t charge you for visiting a teller inside the bank, you can go inside to make a withdrawal, which can help you avoid ATM fees.
When you overdraw your account, the bank charges you a fee. You should keep the bank app on hand to check before making purchases, as they can add up really quickly and become worse with time.
To avoid them, you need to make sure you keep tabs on your bank account. You can also sign up for notifications and more from your bank.
Bank Maintenance Fees
You can also avoid some of the monthly maintenance fees that the banks charge.
Many banks are likely to waive your maintenance fees when you keep the minimum deposit in your account, use the debit card a set amount of times, or use recurring direct deposits.
You can also change to an institution that doesn’t charge monthly. There are plenty of options available out there if you know where to look. Many online banks don’t charge these fees since they don’t have to pay to run a physical location.
In short, there are plenty of ways that banks make money. You’ll want to make sure you’re familiar with all the fees they have so that you can avoid them as often as possible.
But don’t worry, because even if you avoid paying extra fees, your bank will still make plenty of money.
A pioneer in digital banking, Axos Bank offers a comprehensive range of innovative financial products and services with the highest level of security.