How Do Banks Make Money?
Many people establish their first bank account when they are young and keep their money in banks for the rest of their life. You learn about some of the most common types of accounts, such as checking and savings accounts.
However, no one knows how banks create money. What, then, do banks do?
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When most people think of traditional banks, they think of depository banks. A depository bank accepts deposits, makes loans, and occasionally provides associated services such as brokerage accounts and financial counselling.
Retail banking refers to the services provided by depository banks to individual consumers. Corporate or commercial banking is used when they service companies.
Investment banks are financial firms that invest in assets such as stocks, bonds, and currencies and provide specialized services to businesses, governments, and other financial organizations. They provide services including capital raising, underwriting debt and equity instruments, and assisting with mergers and acquisitions.
Credit unions are a different form of financial entity. A credit union is similar to a non-profit bank in that it concentrates on providing inexpensive services to its members, who are theoretically co-owners.
Now that we’ve established the various sorts of banks, let’s look at how they generate money.
A bank earns money by borrowing cash from depositors at a fixed interest rate and lending money to borrowers at a higher interest rate. They generate money by charging interest on loans, sometimes known as “debt interest.”
While interest is a bank’s primary source of income, banking fees account for a large portion (if not all) of its profit margin.
Almost every service provided by banks is subject to a cost. Let’s look at the most prevalent kinds of fees:
Monthly service or maintenance fees are charged by many bank accounts, investment accounts, and credit cards. The accounts themselves do not need much upkeep, especially with the development of internet banking.
Some accounts may not incur monthly maintenance fees if a minimum amount is maintained in the account. However, if your account balance falls below a certain threshold, you may be charged a fee.
You’ve undoubtedly noticed that anytime you take money from an ATM at a bank where you don’t have an account, you’re charged a fee, which may be as much as $3 or $4 for every transaction.
Banks will impose an overdraft fee if you attempt to spend more money with your debit card than you have in your account. The same is true when you “bounce” a check, which means you don’t have enough cash in your account to pay the check’s amount.
Savings accounts, unlike checking accounts, have monthly restrictions on the number of transfers and withdrawals you may make.
When you make an in-store transaction with your debit or credit card, the merchant pays a processing charge, often known as an interchange fee.
Financial services and brokerage accounts are increasingly being offered by retail banks, allowing users to access investments such as mutual funds and stocks.
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