The pillars that support an economy’s foundation are banks or the banking system. Banks provide loans and keep your money safe in their systems. However, a lot of people are unclear about how the banking system operates or how they get profits from it. Despite the complexity of the banking industry, it is simple to comprehend how banks make money from their consumers.
The business model used by banks is one that relies on profit. The banking industry’s business strategy only involves capital, unlike manufacturing or other related sectors. A bank has sources of revenue and sources of expenses. Their main mode of activity is money lending and borrowing.
How does our banking system make money from its customers?
Lets talk about how banking system earn money from the customers.
1. Interest received from customers
The loans made by banks are among their most important assets. Banks offer both secured and unsecured credit to their clients, offering a wide range of loans. All of these loans have a set interest rate that the borrowers must pay back in regular payments.
The interest rate spread, or the difference between interest collected for loans and interest paid for deposits, determines how much money a bank makes.
For banks, interchange fees are another important source of revenue. It is the fee imposed by banking institutions for using debit or credit cards in transactions. A certain fee is imposed on the retailer each time a consumer makes a purchase and swipes their card. The customer’s bank receives the vast majority of the interchange fees. The remainder is paid to the merchant’s bank.
A bank’s ATM only allows a set number of transactions per customer. They have to pay a set price to perform transactions once they’ve gone over that limit.
4. Late payment penalties:
Customers who don’t pay by the due date for clearing credit card balances are assessed a charge. Each bank has a different fee for this service.
5. Minimal balance charges:
Typically, banks have a specific minimum balance requirement for various accounts. Account holders are also subject to fees in the form of fines if their balance falls below that threshold.
When making a loan, banks frequently impose an origination fee. Banks can make a lot of money from this.
For managing your investments and other associated services, banks charge a specified fee. Investment fees include this.
If your account balance falls below zero, the bank charges an overdraft fee. The bank is able to levy interest on the amount that is overdrawn because it is conceivably a short-term loan.
9. Additional account charges:
The bank will charge you for a lot of things. Other than the ones already mentioned, common fees include those for wire transfers, overseas debit card transactions, money orders, and cashier’s checks.
10. Commissions from sales of goods by other parties:
By offering insurance and other mutual fund products to their clients, banks receive a sizable commission.
11. Financial activity fees and costs:
Individual clients are liable for extra fees in addition to the interest rate, such as processing costs, documentation costs, minimum balance costs, penalties for late payments, etc. Additionally, customers must pay a yearly maintenance fee for all of their separate banks’ accounts, cards, services, etc.