Home Business 8 Fascinating Ways Banks Make Money

8 Fascinating Ways Banks Make Money

Most of us use banks and banking facilities like ATMs and mobile banking apps daily. But some people do not know how banks earn money. With savings and checking accounts with little to no maintaining balance yet still earn interest, how do banks make money?

Banks are businesses. And like any other business, banks need to earn income to stay operational. Banks use their depositor’s money to make a profit, and it’s one of their top priorities. Banks need lots of clients and depositors for them to earn. That’s why banks have offers and benefits to attract and retain their clients.

Money to Earn More Money

Banks use your money to earn money. They use their depositor’s money to fund their other clients looking for a loan(personal, home, car, etc.) or mortgages. In return, these clients pay the bank’s interest. A part of the profit from the interest is given to the bank depositors.

For example, You deposited P100,000 in your savings account with a 2% per annum(PA) rate. This means your money can earn 2,000 annually. However, your bank uses your P100,000 to fund someones:

  • Personal loan for 6% PA
  • Car loan for 7.5% PA
  • Credit card for 12% PA

Your bank may have paid you P2,000, but it’s nothing compared to what they have earned using your money. Now multiply that scenario to the thousands and thousands of clients a bank has and the millions, even billions of pesos worth of deposits.

Services and Fees

Banks charge a specific fee for the services they provide. They can also charge you penalties for missing a payment in your loan. Service charges are an excellent way for a bank to earn.

There are many fees that a bank can charge. Here are the most common.

Account fees – These are charges made by a bank just to account with them.

Account fees are charged to maintain and pay for other services your account offers. Account fees can be collected monthly or annually. Some banks offer to waive account fees for maintaining a certain amount in your account. If you’re earning money through your account’s interest, account fees can eat up that earning and help the bank earn cash.

ATM fees – Was there a time where you badly needed cash and your bank does not have an ATM nearby? You were left with no other choice but to settle in withdrawing from another bank’s ATM. These interbank withdrawals come with a fee for using other banks.

Penalty fees – Banks love this one. These are fees that are charged to clients for missing due dates. It may be a mistake on your end, like forgetting a non-banking holiday and paying a day after, or you’re unable to fund your checking account and your issued check bounces. For whatever reason it may be, banks will charge you with a hefty penalty fee.

Commissions – If you’re looking to invest your hard-earned money in bank investment programs to grow your money further, be ready for more fees. You can invest your money in your bank’s investment program, but this kind of service usually comes with investment and brokerage fees. These fees help the bank keep its services up and running.

Application fees – Planning to get a loan? Get ready for more costs! Banks can charge borrowers for application fees. These fees are charged to potential borrowers for processing a loan. These are upfront payments that you need to pay before a loan can get approved.

Transaction, withdrawal, and transfer fees – Most banks have transaction fees for their services. They can charge you for:

  • Over-the-counter withdrawals
  • Fund transfers to other banks
  • Withdrawals outside the country

These are some transactions that banks usually charge fees on.

Non-sufficient fees – Some accounts have a maintaining balance requirement. And if your account falls below its required monthly average, banks can charge a penalty on you for not maintaining your account. Banks usually deduct their liabilities on the remaining balance on your account. If your remaining balance is insufficient for the penalty, your bank can close your account. Banks earn from the hefty penalties they take from your account, and you shouldn’t ignore these if you want to keep your account open.

Interest

This is where another bulk of a bank’s income comes from. When you deposit your money into a bank, they will use it to fund other people or businesses’ loans. Banks will pay you a certain amount as interest for keeping your money with them, but the bank probably earned triple or up to 10x of what they’ve paid you.

Interchange

Have you ever encountered a store where their credit or debit card purchases had a minimum and a small fee? That fee is called interchange. Interchange is the fee that banks charge merchants for using their credit or debit card facility. This is another fee banks impose to make a

profit.

Forex

Banks can also buy and sell foreign currencies on the global market. These currencies fluctuate from day-to-day. Banks can earn from trading in the forex market. Banks can again purchase foreign currencies from people who want to exchange their money for a local currency.

Lending to other Banks

Banks borrow from other banks all the time. They borrow vast amounts of money for short periods. The loan usually lasts for a few months or even less. Sometimes, bank to bank loans stays only overnight. Banks earn profit from the interest of the inter-bank loan.

Secured Loans

If you got a loan from a bank with collateral, that is a secured loan. If you default on your loan, the bank can seize your collateral as payment for the lost money on loan. They can sell your collateral to earn a profit.

However, secured loans are not available for everyone. Not all of us have properties we can use as collateral. If you need a cash loan, you can apply for a loan from a licensed lender like moneylender clementi and yishun money lender.

Mortgages

If you bought a house and applied for a housing loan, your home is the collateral. Like a secured loan, banks can take your place if you fail to pay for your loan. They can sell your house to get back the money lost.

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