Money is traded all around. They make a profit by helping people get the money they need to invest in their businesses or purchase goods. Have you ever wondered how banks make money from that money? Fees for services like wire transfers, foreign currency exchanges and overdraft protection are some of the ways banks make money.
They make a lot. Big banks make billions of dollars each year. They are able to offer customers financial products and services at competitive prices. Bank of America made almost $18 billion in 2020. The bank made $7.3 billion in 2019.
Where is all the money coming from? Everyone is wondering where the money is coming from. Monthly maintenance fees, interest fees on loans, and overdraft fees are some of the things charged to you. The fees allow banks to remain in business and provide services to customers.
Here are the most common ways banks make money. By knowing how banks make money, you can make better decisions about your money and financial services.
Top ways that banks make money
1. Fees
If you’re a customer of a traditional bank, you’re no stranger to fees. Banks make a lot of money off of small fees. It’s important to read through the fine print when opening a bank account. Fees can add up to a lot for the bank. It is important for consumers to be aware of any fees associated with their banking services.
Here are some of the fees that banks charge. Before signing up for an account, be sure to ask your bank about any additional fees that may be applicable to you.
Maintenance fees
Many checking accounts and savings accounts come with monthly maintenance fees, which typically range from $5.99 to $25 each month.
Fees can take a lot of money out of your finances over time.
A maintenance fee of $25 a month is $300 a year. This can add up quickly and have a big impact on your budget. You will have spent over a thousand dollars on fees over the course of five years. At the end of five years, you would have almost $1,800 if you had invested $25 a month in the stock market. This shows how compound interest can help you grow your investments over time.
Many banks allow you to avoid maintenance fees by keeping an average daily balance or linking a certain number of monthly direct deposits. Some banks offer free checking accounts with no minimum balance or maintenance fees. If your bank charges a monthly maintenance fee, read the fine print to learn how to avoid it. It’s important to keep an eye on your account balance to make sure you don’t pay any extra fees.
Overdraft fees
If you don’t have enough in your account to cover the cost of the transaction, overdraft fees occur. It’s important to keep an eye on your account balance. If your bank charges them, you may be hit with a hefty fee. Check with your bank to make sure you understand their policies regarding bounced checks. If you have a negative account balance, some banks will charge you a daily overdraft fee. It’s important to keep track of your account balance because this fee can quickly add up.
This is a big moneymaker for banks. Banks look for new and innovative ways to increase their profits. In fact, banks collected over $30 billion in overdraft fees from consumers in 2020. It is definitely something to watch out for. You may have to pay the price if you make a mistake.
If you are not a repeat violator, you can negotiate overdraft fees. Speak nicely to the customer service agent. If they have the ability to waive the fee, ask them to review the transaction. Once you have explained the situation to the customer service representative, be sure to ask politely for their help in resolving the issue. Banks give out a lot of free stuff. There are a variety of freebies, from a tote bag to a checking account. If you violate the policy, you will have to pay the fee. If possible, avoid overdraft fees as they can add up quickly.
If you don’t pay the fee, the bank could shut down your account. It is important to stay on top of your payments because this could lead to serious financial consequences. If you don’t pay, the bank will send your outstanding balance to collections. This can affect your credit score and make it harder for you to get a loan in the future. If you go to open a checking or savings account with that institution, you could be denied the next time. You might have to look into other banks and credit unions to open an account if that happens.
Interchange fees
Another way banks make money is through interchange fees, which are collected when you make a transaction at a retailer using a debit card or credit card. The more you use your card, the more money banks make from interchange fees.
Merchant interchange fees are charged by banks, and the cost is usually split between your bank and the store. As a result, banks may pass on these costs to the customer in the form of higher fees or charges.
You don’t have to worry about interchange fees as a consumer. Most merchants take interchange fees into account when calculating the price of goods and services. You can find them at smaller stores that have card minimums. It is important to remember that these cards are not accepted everywhere. If you go to buy a pack of gum at a gas station with a debit card, the store may decline your transaction or ask you to buy more stuff because they end up having to pay too much in fees.
2. Net interest margin
Banks make net interest margin from interest earnings. It can be used to compare different banks and is an important measure of a bank’s profitability.
So what does that mean? In order to understand the implications of this statement, we need to find more information.
It all starts with loans. From student loans to mortgage loans to car loans and personal loans, there are many ways that people can borrow money from banks. Interest fees are charged by banks to cover the costs of lending. It is important for borrowers to understand all of the details of the loan.
When banks collect interest fees from borrowers, they sometimes pay a percentage back to customer deposit accounts in the form of an annual percentage yield. This helps customers earn a return on their deposits without having to take the risk of investing their money. Net interest margin is the amount of interest the bank keeps. The net interest margin is used to fund the operations of the bank.
There is nothing illegal about this. It is within the law. It is part of how banks make money. They charge interest on loans, collect fees for services, and invest customers’ deposits. The interest rates you can earn from traditional banks are very low. Banks are able to keep their margins higher than they would be in a more competitive environment because of the lack of competition. Consumers are usually the last to be paid. If they rely on their payment to cover important expenses, this can be problematic.
3. ATM fees
When you are out and about, be careful about which ATM you use because many banks charge $3 or more for out-of-network ATM fees. To avoid these fees, it’s a good idea to check with your bank to see which ATMs are part of their network.
Some banks reimburse customers for third-party ATM fees, while others don’t. It’s a good idea to check with your bank to see if they can help offset the cost of ATM fees. If you plan ahead, you can get the cash you need from an in-network ATM.
Fees are usually charged for using third-party ATMs. Fees may not be charged for using outside ATMs.
Why online banks and credit unions offer better rates
If you are shopping for a bank, you will find that online financial institutions offer better rates than traditional banks. It is important to consider all options when choosing a financial institution.
For example, online banks often provide high-interest savings accounts (HYSAs) that pay more to depositors than traditional banks do. Or, sometimes they offer better rewards for spending activity, like Current Bank.
The main reason for this is because online banks typically don’t have to pay much, if anything, for real estate. Since they can avoid brick-and-mortar locations, there are fewer employees to pay and less security to worry about. Many businesses have been able to increase their profits because of this. They are able to give more back to consumers who deposit money with them.
Credit unions are community-owned nonprofits. Credit unions can offer lower interest rates on loans and higher yields on savings accounts. Most of the returns go back to consumers in the form of higher interest rates on deposits and low interest rates on loans. Economic growth and stability are stimulated by this.
You need to be a member of a church group, school, or community to access a credit union. There are many benefits to being a member of a credit union. If you have access to one, you should take advantage of the low rates they offer. Some credit unions allow their members to sponsor other members who wouldn’t qualify on their own. The same services and accounts are available to those who qualify for membership on their own.
Frequently asked questions
How can I avoid monthly maintenance fees on my bank account?
You can check with your bank. It’s important to stay on top of your finances, so be sure to check in with your bank frequently. Keeping an average daily balance, linking direct deposits, and having a total amount of assets in associated accounts are some of the ways to avoid paying the fee. It is important to read the terms and conditions before committing to a financial institution.
If you don’t like paying banking fees, look for a bank that doesn’t. A great way to save money is by avoiding banking fees, so it’s worth doing some research to find a bank that works for you. Fees may be required for checking, savings, or even certificates of deposit. If there are any fees associated with the accounts you are considering, be sure to ask your financial institution. Every bank is different. Before choosing which bank to use, it is important to research the different options.
What are commercial banks?
Retail banks are financial providers that are for profit. Checking and savings accounts, loans, credit cards, wealth management, and more are some of the services they offer. They make money by charging late fees, overdraft fees, and monthly maintenance fees.
Some commercial banks are also investment banks and massive financial services companies (e.g., J.P. Morgan Chase and Citibank. Morgan Chase and Citibank are two of the largest financial institutions in the world, offering a wide range of banking services to customers around the globe.
Do banks offer brokerage services?
Some of them do. You might be better off working with a dedicated broker than with a bank. An ideal choice for those looking to purchase or refinance property is a brokerage provider that offers a wider range of options and more competitive rates than a traditional bank.
Check out our list of the best stock brokers.
Are all account fees bad?
It depends on the service that your bank provides. It makes sense to pay small fees if you are paying for convenience.
You should try to avoid them. Some items are more difficult to avoid than others. Try to find a bank that does not charge fees. There are many Federal Deposit Insurance Corporation (FDIC) supported institutions to choose from — and it won’t hurt your credit score to switch banks.
The Bottom Line
The primary goal of most banks is to earn a profit. The interests of banks may not always align with those of their customers, so it is important to be aware of this when evaluating banking options. Don’t hesitate to contact your bank or switch providers if you’re not happy after you notice a fee you didn’t expect. Understand all of the fees associated with your account by reading the fine print.
Finding a banking partner that meets your needs without nickel and diming you is what this is about. Finding a banking partner will help you make the most of your money.
