23.10.18

How banks earn money

Have you ever thought about how banks allow you to earn money by providing different bonuses and interests and at the same time earn money for itself? It becomes more oddly when you can use your account without fees in addition to bonuses. However, you may know that prosperous banks earn a lot of money while less successful lost them and become bankrupt. So, let’s find out how these financial institutes make money to expand our knowledge in this difficult but important area of life.

First of all you should know that banking is a business similar to other. So, the main activity is related to selling of r products and services. We can highlight three main ways banks earn money:

  • Net interest margin
  • Interchange
  • Fees

The first way is a great example of how money works. It is not a secret that when you make a deposit, you also give permission to bank to use your money. The common way of using money is loans. The bank loans your money to other people at interest. There are loans for business, credit cards, short-time loans, mortgage, student loans, card loans and other. By this way the bank earns money due to interest on loans. And a small part of this money is accrued to your deposit account. Therefore, banks are interested in you keep the deposit as long as possible. In fact, they can work thanks to the money of investors. As a result banks make a profit on the difference in the interest rate of the debtor and the interest rate of the depositor.

The second way is quite interesting. It is related to the question “Why banks offer bonuses for using of their credit cards?” The answer is because of processing credit and debit transactions. When you use a credit card you pay interchange fee. As a result almost of money from interchange goes to your bank and a few goes to the merchant’s bank.

And the last main way is fees. Obviously this is not the most popular way of earning for banks. There are well known among cardholders fees for late payment, overdraft and ATM fees. Of course there are other charges but previous are the most common. So, this way of making money is mostly like punishment.

As you can see banks conduct a comprehensive activity which requires a perfect knowledge of finances, skilled staff and a great advertising attracting new customers. Take there requirements and try to estimate whether the bank is reliable.

To help you with the choice we provide a top 5 of banks you can trust. This top based on total asset of banks and reviews of customers.

  1. JPMorgan Chase
  2. Bank of America
  3. Citigroup
  4. Wells Fargo
  5. Goldman Sachs

Hope you will make a correct decision. Good luck!