Are you curious about how banks make money? Because commercial banks are for-profit financial institutions, their job isn’t just to hold your money; it’s also to make a lot of money for themselves. Banks make money in a variety of ways, the most common of which are fees and interest.
How Banks Generate Money?
When you open a bank savings or checking account, your money isn’t just sitting there.
When you make a deposit, your bank “borrows” the money from you in order to lend it to others. Consider all of your car and personal loans, mortgages, and even bank lines of credit. Unfortunately, money does not grow on trees, so the bank uses your funds to temporarily fund these loans. In exchange for your generosity (which you are most of the time unaware of), you are compensated in the form of interest — a sort of courtesy for entrusting that financial institution with your money.
Larger banks are frequently comprised of separate branches that cater to different types of customers and services. Commercial or retail banking branches, for example, may provide more common bank services, such as opening checking and savings accounts or issuing checks.
Other Ways Banks Make Money
There are other ways for banks to make money, such as:
Investing their funds — In addition to profiting from their customers’ investments, banks invest their own funds in order to make a profit.
Advisory or consulting services — Banks can also profit by serving as an adviser or consultant to outside businesses, assisting them with financial goals and strategies.
Earning commissions — Banks may have partnerships or relationships with other financial institutions, such as brokerages and investment services, that pay them a referral fee for referring customers.