How do banks makes money

Still, banks have to generate revenue in excess of what it costs them to operate branches whether you like it or not — and in order to do that, they get creative about finding ways to make more money off of you. The biggest way banks make money is by minimizing the interest they pay you on your deposits. Your bank loans it out and earns interest on those loans. Ideally, your bank would then share that interest with you. In reality, they seldom do. In short, they maximize the interest they earn while minimizing what they pay you on your own deposits.

Say you have a checking account that earns no interest which is fairly common. If your bank earns 2. Speaking of minimum balances, most banks will charge you a fee if you fall below a particular account balance. Worse still, you can trigger this fee if you fall below the threshold even once — even if your average account balance far exceeds the minimum and even when you hold a balance way above the threshold in another account at the same bank.

This is just one example of the many account fees banks charge to make money off of their customers. Another example of a trigger-based fee that generates a significant amount of revenue is the overdraft fee.

Banks also make money on the fees associated with currency exchange and wire transfers. Imagine having to save all of the money you needed in order to buy a house. We wouldn't be able to buy houses until we retired! Banks also charge fees for services like checking, ATM access and overdraft protection.

Loans have their own set of fees that go along with them. Another source of income for banks is investments and securities. Sign up for our Newsletter! Mobile Newsletter banner close. Community banks primarily make money from the interest they earn lending money to local residents and small businesses. The money comes from depositor funds held in several types of bank accounts.

While many large banks also make most of their income from interest, they earn a larger share of their revenue from non-interest sources than community banks do. Large banks are also often made up of different divisions that focus on various types of customers and services.

For example, their commercial banking or retail banking divisions may offer traditional bank services, such as deposit accounts like checking or savings and issue personal and business loans. Many banks make the majority of their money from charging interest on loaned funds, such as home loans, auto loans or personal loans that are issued to consumers. Many banks also offer loans to small and large businesses.

Banks create new money whenever they make loans. This short video explains:. Banks can create money through the accounting they use when they make loans. By creating these electronic IOUs, banks can effectively create a substitute for money. Every new loan that a bank makes creates new money. When a bank makes a loan, for example to someone taking out a mortgage to buy a house, it does not typically do so by giving them thousands of pounds worth of banknotes.

Instead, it credits their bank account with a bank deposit of the size of the mortgage. At that moment, new money is created.