Banks definitely make money. They have employees to pay, daily operation costs, and oftentimes advertising expenses. Like any other business, banks take money to operate.
Rest assured that no matter how small or large a bank is, they make a profit, so let’s see how they make their money.
How Do Banks Make Money?
Banks have several ways that they make money.
They charge fees for services and accounts, they charge interest on money they loan, and they charge merchants fees for processing credit and debit cards.
They also borrow money from their customers.
Interest
The interest that banks charge on loans is income for the bank. When the money borrowed is paid back, the bank keeps the interest. The rates at which the banks charge will vary.
Fees
Fees make up a portion of a bank’s income. These are fees that are charged for things like notary public services, faxing, accounts, and more.
How Do Banks Make Money on Checking and Savings Accounts?
When we deposit money into our accounts, the bank doesn’t put them in a folder or drawer and wait for you to need it.
Most of the time, that money is what is lent to other customers, and the bank charges the customer an interest rate percentage. The money earned from the interest collected is the bank’s profit.
For example, the bank may loan you $5,000, and they will charge you 6% interest ($300). You will have to pay back the original amount borrowed plus the $300 interest.
The bank will pay back the $5,000 they borrowed from someone else’s account, and they will keep the interest to earn a profit.
Bank Fees You May Have to Pay
Checking or savings account fees
Banks make money through the various fees that they charge their customers. Many banks charge a monthly service fee on their checking account and savings accounts.
They may also charge withdrawal fees, depending on the type of account that you have with them. Some accounts have a limit on how many withdrawals you can make in a month.
Overdraft fees
Overdraft fees are another popular fee that many banks have. Overdraft fees are charged when the bank covers a charge on your account that you didn’t have the money to cover.
It’s the bank’s way of loaning you the money to pay for the purchase that you made, and then they charge you a fee to use it. It is automatically paid back when you make a deposit.
ATM fees
Banks charge you to pull your money out of the bank at another bank’s ATM or at the Presto Machine at the grocery store.
If you are not a customer of the bank that owns the ATM you are using, then that bank will also charge you a fee. So, you will be charged two fees for withdrawing money from a machine not owned by your bank.
Loan fees
Banks charge a hefty interest fee on money that you borrow from them. Banks generally borrow the money from other customers and lend it out.
They charge the loan customer an interest percentage. That interest becomes profit for the bank once it’s paid to them.
Brokerage commission fees
There is not only interest on the money you borrow but also a broker fee to write the loan. That fee covers the paperwork end of the loan. The broker fee will also cover the time of the employee who writes the loan.
Notary Public service fees
Notary Public services are offered at almost all branches of any bank. They charge customers and non-customers for these services.
Bank customers may get charged a small fee while non-customers will likely get charged a higher fee. This fee is bank profit.
Money order and wire transfer fees
Money order and wire transfer fees are another way that banks make a profit.
Both customers and non-customers get charged fees for these services. Like other services, customer fees are slightly lower than those of non-customers.
How to Protect Yourself from Paying Bank Fees
There are many ways to avoid bank fees:
- You can use free checking and savings accounts. Many banks offer free accounts. You may have to sign up for paperless statements, have direct deposit, or maintain a minimum daily balance.
- Using the ATM at the bank in which you are a customer will let you withdraw money without fees.
- If you do not overdraft your account, then you aren’t stuck with hefty overdraft fees. Don’t spend it if you don’t have it.
- Do your research and find out what banks have the lowest fees. Some of the newer online banks don’t have fees for many of the things that they offer. Unfortunately, they are generally direct deposit style banks with nowhere to make a physical deposit.
How Much Money Does a Bank Make?
Banks make enough money to cover their operating expenses and still have a profit left over. Some of the larger banks make a huge profit and could cover the expenses of many branches.
Many of the big banks make billions of dollars per year. About 15%–20% of their annual revenue is from ATM fees and overdraft fees. Large bank chains are averaging about $2 billion a year in ATM fees and overdraft fees.
Service fees, interest rates, and late fees make up a small portion of a bank’s revenue.
As an overall corporation, banks can profit a cumulative average of $6 billion a year in revenue. In fact, that number is on the rise each year.
Overall
If you do your diligence, you can avoid being the one paying the profit for many banks.
With the right mindset and research, there are many ways to avoid paying bank fees. Just look for the lowest rates possible and do not overspend your money.