How Do Banks Make Money?

Banks create a practical approach to securing and saving your money. However, many do not understand that banks make money through various avenues. The main revenue stream for most commercial banks is the interest gained after lending money to borrowers. Read on to learn the multiple ways banks make money.

How Banks Make Money

Banks are lenders, and it is through lending that they get to turn a profit. Generally, their financing comes from borrowing money from depositors and compensating them with a specific interest rate. The banks then lend borrowers the money and charge a higher interest rate for a profit. Review the banking page of Achievable’s FINRA SIE exam prep course to learn more about how banks make money.

Interest Income

The primary way commercial banks make money is through interest income. They borrow depositors’ money not in use, and lend out the funds to borrowers who pay more at a later date. The difference between the interest paid and received is where the bank draws its profit.

Interest rates are crucial to any financial institution since they determine how much profit the company generates. It would help to know that these rates are volatile and set by supply and demand pressures.

Capital Markets-Related Income

Capital markets are the ideal marketplace for matching capital-seeking businesses to investors with the capital and require specific returns on their money. Most banks have their in-house brokerage team to help execute the trade and deliver professional services. Investors also get assistance with debt and equity underwriting from dedicated investment banking teams.

Some of the services used to facilitate capital markets activities in banks include;

• Underwriting services
• Sales and trading services
• M&A advisory

Fee-Based Income

The fees charged by banks also contribute to their revenue. Most banks charge non-interest fees for the services they provide. Good examples include:

• Checking accounts
• Mutual fund revenue
• Credit card fees
• Custodian fees
• Investment management fees

Unlike capital-related income, fees provide a more stable income for banks since they do not fluctuate over time.

What Are the Different Types of Banks?

Retail Banks

Retail banks offer various banking services to the public and have several offices to promote customer convenience. Some services provided include checking and savings account, automobile financing, and loan and mortgage services. They also offer investment access in mutual funds, CDs, and IRAs.

Commercial Banks

Commercial banks offer tailored services to businesses, from minors to corporate owners. They provide standard banking and credit services, trade finance, employer services, and cash management.

Investment Banks

Investment banks help corporate customers with complex financial transactions and services. They act as financial intermediaries in transactions like underwriting and assisting with mergers and acquisitions. It would help to reach out to a financial specialist like Brad Kern before settling on an investment bank.

Central Banks

Central banks are government-authorized independent institutions that oversee the country’s money supply and monetary policy. They do not deal with the public directly and are responsible for the currency’s stability and the entire economic system.

The way a bank makes money significantly depends on the services it offers to its clients. However, it would help to note that fees and interests are the primary avenues for revenue generation in banks.