Most working people have a bank account where they keep their money and allow it to grow with interest until it is needed for daily expenses. Each and every day millions of people make deposits of money into various banks around the world. Whilst a bank is designed to store and look after your money it is also a business that needs to make money in its own right. There are various ways that banks make money and ensure that they are able to deliver important services to their customers. So, how do the banks make money?
How to banks make money?
Banks are a business just like any other business. However, instead of selling a product such as food, cars or electrical items they “sell” money, loans, bank accounts and financial products. There are three main ways that banks make money. The first is through the interest that is charged on loans and credit cards. Banks loan money at a higher interest rate than that which they have to pay on the accounts of people who have deposited money into the bank. For example, the bank may pay 2.5% interest on deposited money in bank accounts then they would then have to charge a higher interest rate on loans to make a profit. This applies to all the loans available from a bank, including credit cards.
The second way that banks make money is to charge fees on various products that they offer consumers. Most bank accounts attract an accounting fee. Drawing money from an ATM or using the bank’s facilities may also attract a fee. Banks will also charge fees if you overdraw your account or if you want additional features, such as a checking account.
The third main way that banks make money is by investing a certain amount of money that is deposited by customers. In this way the bank can increase the initial amount of money, pay back the depositor with interest and keep the difference for themselves. Most banks have extensive share portfolios and other investments which continually make them money.