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- 1 How Do Banks Make Money?
- 2 How Banks Make Money With Interest
- 3 How Banks Make Money Through Fees
- 4 Other Ways banks Make Money
- 5 How To Lower Your Bank Fees
- 6 Bottom Line
Banks make most of their money from the interest and fees they charge on loans. But banks also make money in other ways.
Banks help people and businesses store money and get credit. But financial institutions are also focused on making money and making money from the same customers they’re serving.
If you know how banks make money, you’ll know what to look for in a new bank.
How Do Banks Make Money?
Community banks make most of their money from the interest they earn when they lend money to people and small businesses in their area. The money comes from different types of deposit accounts where people put money. Even though many large banks also make most of their money from interest, they make more money from other sources than community banks do.
Large banks often have different departments that focus on different types of customers and services. For example, their commercial banking or retail banking divisions may offer traditional bank services like deposit accounts (e.g. checking and savings) and personal and business loans. Their investment banking departments, on the other hand, may help big businesses and governments raise money, manage their money, and invest the bank’s money.
How Banks Make Money With Interest
Most of the money that many banks make comes from charging interest on loans like home loans, car loans, and personal loans that they give to customers. Small and large businesses can also get loans from banks. If a customer has a credit card and carries a balance, they may also have to pay interest on their debt.
Customers get a service from banks when money is lent, and interest is how banks make money off of that service. Interest is usually calculated as a percentage of the amount that was borrowed.
Banks charge interest on credit cards, loans, and mortgages, among other things. They also change over time and according to how the economy is doing.
When a consumer borrows money or takes out a loan, they have to pay interest until the money is paid back to the lender. A small amount of this money is used to pay interest to people who put money in their checking or savings accounts. The banks keep any money that is left over.
How Banks Make Money Through Fees
Bank fees are another way that banks can make a lot of money. Depending on the type of account or service you have with the bank, these can be very different.
- Bank account fees: If you have a checking or savings account, the bank may charge you a monthly maintenance fee. You may also have to pay fees to use bank-related services, like taking money out of an ATM that isn’t owned by a bank, using your credit or debit card in a country other than the U.S., or getting a money order or cashier’s check. There may also be fees related to your account if you pay your bills online, or go overdrawn when you don’t have enough money in your account. See no-monthly fee checking accounts…
- Credit card fees: People who open and use credit cards from the bank may have to pay a fee every year. There are also often fees based on how the card is used, like for cash advances, balance transfers, late payments, or going over the credit limit. In addition to late fees, if you pay 60 days or more after the due date, you may have to pay a penalty APR (Annual Percentage Rate).
- Fees for loans and services: Banks may also charge fees when they give out loans or sell other financial products like insurance policies. Some banks will give out loans, but instead of collecting interest from the borrower, they will sell the loan to another bank. The bank could still make money on the origination fee and sale of the loan, or it could charge fees to keep the loan in good standing.
- Investment fees: Banks that offer investment services can also charge fees for managing clients’ investments and for brokerage services (a fee each time you buy or sell a stock, for example). Mutual funds, annuities, and other financial products that banks make or sell can also bring in commissions or fees.
More On Bank Fees
Fees come in many shapes and sizes, but they are usually charged to open and keep a bank account or to do a transaction. Look online or in the fine print of your financial documents for a list of fees.
It’s important to learn about the different kinds of fees banks charge so you can look out for your own financial well-being. Knowing what fees are and why they are charged is a great way to manage the money you keep in the bank and keep your budget from getting out of hand because of mistakes or oversights.
NSF (Non-Sufficient Funds) Fees
Customers are charged non-sufficient funds fees when they try to make a purchase but don’t have enough money to pay for it. The transaction “bounces,” and the customer is charged an NSF fee by the bank.
When your bank account balance goes below zero, this is called a “overdraft.” A fee is charged for going over your limit, and interest may be added to the amount you went over because the bank may see it as a short-term loan.
There are several reasons why ATMs charge fees. If you use an ATM that isn’t part of your bank’s network, you’ll probably have to pay a fee. If you take too much money out of your account through ATMs, you may have to pay another fee. See account options that avoid out-of-network ATMs…
Late Payment Fees
If a customer misses a payment or pays their bill late, fees will show up on their credit card or bank statement. Whether your statement is on paper or online, it will have a due date. Make sure you know this date so you don’t miss a payment.
Minimum Balance Fees
Some bank accounts need to have a certain amount of money in them to stay open. If you don’t have this minimum balance at the end of the month, you’ll be charged a fee. If you don’t keep your account’s minimum balance, your bank may even close your account. Online accounts like Aspiration don’t have minimum balance requirements (more here).
Depending on your account, you may only be able to take out a certain number of funds per month. Business checking accounts are for doing business, and you may be able to make a certain number of withdrawals before you have to pay a fee. On the other hand, withdrawals from savings accounts are often limited more strictly. The federal limit is 6 withdrawals monthly. If you withdraw more than the maximum number of times, you’ll have to pay a fee each time.
Wire Transfer Fees
When you send money through a wire transfer, you have to pay a fee. A lot of the time, they are used to send money safely and securely abroad.
When you use a bank’s debit card or credit card to buy something, the bank can also make money. When a card is used to buy something, the merchant pays a fee. With credit and debit cards from banks, like Visa and Mastercard, a portion of the fee goes to the bank that issued the card. This is known as an “interchange fee.”
Businesses that want to accept debit and credit cards can also get a merchant account from some banks. Then, banks can get fees from the merchant for processing sales made with cards.
Other Ways banks Make Money
- Investments: Banks may be able to invest their own money in addition to making money from fees and commissions on the investments of their customers.
- Advisory services: Some banks also make money by giving advice to other businesses. They might sell research or ideas for investments to people or businesses. Companies can also hire the bank to help them raise money, go public, or merge with another company.
- Commissions: Banks may have partnerships with insurance agents, brokerages, investment services, and other businesses that pay them a commission for sending customers their way.
How To Lower Your Bank Fees
Even if you use the services that banks offer, you can look for ways to save money by keeping your banking costs to a minimum.
- Look for banking services that don’t charge fees. If you just want a basic checking or savings account, look for a bank that doesn’t make you keep a certain minimum balance or charge you a monthly service fee. Keep in mind, though, that even if you have a fee-free checking account, you may still have to pay other fees, like ATM fees from third-party providers.
- Don’t opt in for overdraft services. Overdraft fees can happen if you use your bank or credit union’s overdraft service. Instead, keep an eye on your balance and balance your checkbook often to avoid fees for not having enough money in your account.
- Know what you’re getting for the money you’re paying. If you think the benefits of a service or product are greater than the cost, it’s not a bad idea to pay for it. For example, annual fees on credit cards may be worth it if the perks and rewards more than make up for it. But there are also many rewards cards, like travel cards, that don’t have annual fees.
- Don’t fall for sales tricks. You might think of bank tellers as helpful people who work in customer service. But at many banks, they are also expected to sell things. Tellers may try to get you to open more accounts at the bank so they can meet their sales goals. When you buy investments or insurance from a bank, the bank may get a commission or charge you a fee. If your financial adviser works for a bank, there may be a conflict of interest, especially if your adviser gets paid on a commission basis.
- When you’re looking for a loan, shop around. The fees and interest you pay on a loan may be one of your biggest banking costs, especially if you’re getting a car loan or a mortgage. But you can shop around for a lender; you don’t have to borrow money from the bank you already have. Shopping for a loan won’t necessarily hurt your credit, and you don’t have to accept a loan offer when you’re approved. If you look at what different lenders have to offer, you can find a loan with the lowest fees and interest rates.
In general, the less money you spend on bank fees and penalties, the more money you’ll have to pay off debt, save for the future, and invest.
More Tips To Avoid Bank Fees
Even though you can’t avoid all bank fees, you can use these tips to avoid losing money on fees that aren’t necessary.
- Use services available online. Most banks offer online banking, which lets you check your accounts from anywhere. Sign up for an online account or log in to the mobile app for your bank to use these services. Set up the right security measures, like a strong password or security questions.
- Keep tabs on your balance. Use an online banking platform or app to keep a close eye on your accounts once you have access to one. Check your account balance so you don’t overdraw and get charged a fee for not having enough money in your account. You can also use this easy online access to keep an eye on your account for any mistakes or suspicious activity.
- Set up automatic payments and notifications. Bank fees can get expensive when people make mistakes. You can use your app or online bank to set up automatic loan payments, get notified when a direct deposit is made to your account, and set up alerts for when your balance drops below a certain amount or goes into overdraft.
- Sign up for direct deposit. Direct deposit is another easy, automated process that can help you avoid fees or consequences that aren’t necessary. Some bank accounts need to have a certain amount in them in order to stay open, and if your account falls below this amount, the bank may charge you a fee. Set up direct deposit to make sure that your hard-earned money gets into your account and keeps it open without any fees.
- Don’t Overspend. A good way to avoid overdraft or NSF fees is to not spend more than you have. Build up an emergency fund so that if something unexpected happens, you won’t have to overdraw your account or get a loan.
Banks are centers for money and financial services. They lend money to people and keep it safe for them. Banks charge money for their services and financial products, just like any other business that wants to make money.
Learn how to handle your money, and banks won’t be able to make as much money off of you.
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