Even though money itself might be a made-up concept, fiat currency is not. It is backed by the government that it's issued by, and it is what runs the world right now. But how does a bank go from ensuring that your money stays safe with them to making money from it?
So how do banks make money from consumers? Is it only through the monthly fees that it charges its customers? Partially, but there's more to that story.
US banks are 'swimming' in money as deposits increased by $2 trillion during the coronavirus pandemic. Wow! That's a whole lot of money that the US banks will likely be able to use to make more money.
Read on to get the fascinating details on how exactly the banks make money using your deposited money.
The fascinating thing about banks is that they are always making money off of money that's not their own. Every time you deposit into your bank account, the banks are lending out that exact money to others in the form of loans and mortgages. The interest paid on these loans and mortgages is one of their primary income earners.
Banks are always interested in ensuring that you put your hard-earned money in their bank accounts and will incentivize such behaviors through various offers such as high-interest savings accounts.
The banks also make money from interchange fees. These are the fees that they charge merchants and shopkeepers every time a customer buys something off through a debit or credit card processor. This fee is paid to the bank by the merchants and is another one of their income sources.
Finally, banks also make money through fees. There are many kinds of fees, such as overdraft fees, late fees, monthly service fees, ATM fees, minimum deposit limits, and more.
Let's look at the way your deposit is used by the bank without you being aware of it.
This is the story of how banks make money on savings accounts.
Most stories start with the hero meeting the heroine, but in this story, the first thing that happens is that you, as an honest hard-working citizen, deposits their money into a bank that you trust.
Very few people switch banks once they've decided on one. There's a considerable amount of loyalty in banking, with most people staying an average of 12 years with their banks.
When you got your first job, you might have decided that it was time for you to get your own bank account. Or your parents decided that for you. Either way, you got an account at the same bank as your parents. Why make it more complicated?
And from then on, you started to deposit smaller and then larger amounts of cash into that account. Overtime you then open up 401ks, mutual funds, stocks, and other accounts with said bank.
How does a bank make money from these deposits? As you will see below, it's through lending your money out.
The banks love when you deposit money with them because they are not going to leave that money lying around in your accounts. Sure, it might look like your money is sitting pretty in your account when you check your accounts online. But that's not the real story.
Your money might get recycled through loans and mortgages several times throughout its lifetime. The longer you leave a deposit with a bank, the better it is for them, because they can lend your money repeatedly. There are many kinds of loans out there, like home mortgage loans, car loans, student loans, and more.
The great thing is that all that money being lent out isn't given away for free, of course. It is lent out with interest on top. This interest rate depends on a variety of factors, including the individual borrow profile, macroeconomic conditions, and what the Federal interest rate is.
Banks can make immense amounts of money because of the wide spread between the tiny interest rates allotted to savings and checking accounts, and the high-interest rates charged on loans and mortgages.
The bank is always working to make money from your money.
Thankfully, there are regulations on how much the banks are allowed to 'work' with your money, especially the money that's in FDIC insured accounts. But the banks also invest your deposited money into other ventures. Each bank is different in the kinds of investments it makes.
Some might be into real estate, others into equity markets and even some through alternative investments such as venture capital. Each bank differs in the way it invests the money, but the ultimate goal is always to make money from your money.
Banks made over $34 billion in overdraft fees alone in 2018. Bank fees are one of the largest revenue streams for banks and typically come in the form of the following types of fees:
A survey conducted by Cornerstone Advisors said that if a customer is switching accounts, the main thing they look for is low monthly fees.
No matter how low your fees might be, you will likely end up paying the bank to store your money through fees on top of the ways they use the money to make more money.
All in all, now you should have a good idea of how banks make money. But the truth is that it doesn't matter how they make money. The final goal here is to not prioritize your financial health and stop paying excessive amounts of fees. You can typically get most of these bank fees refunded by negotiating yourself or use our automated negotiation platform at Harvest, the platform designed to achieve financial stability for the 99%.
Harvest helps increase the net worth of the 99% through artificial intelligence and financial automation. To date, Harvest has refunded over $2M in bank fees and interest charges to its members with the ultimate goal of increasing the net worth of everyday Americans by $1 trillion by 2030. Our platform starts with providing immediate relief through bank fee and interest charge refunds, orients a member's financial health with our proprietary PRO Index™, and keeps track of net worth over time aided by our suite of financial tools. Check out our 8-step guide on "How to Build Wealth from Nothing" to get started on increasing your net worth.
Disclaimer: Harvest is not providing financial advice. The content presented does not reflect the view of the Issuing Banks and is presented for general education and informational purposes only. Please consult with a qualified professional for financial advice.