How Big Banks Make Money

Exploration Essay

The ways that a typical bank makes money can depend on the type of bank and its type of customers. Average banks mostly make money from the interest they earn from giving money to their customers and businesses. The money comes from something called depositor funds which are held in several types of bank accounts. While many large banks also make most of their income from interest, they earn even more from non-interest strategies. Large banks are also often made up of different divisions that focus on different 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. However, their investment banking divisions may help large corporate and government clients raise money, manage their money, and invest the bank’s money. Banks can also make a lot of money on banking fees. These depend on the type of account or service you have with the bank. One example of it is bank account fees. Banks may charge you a monthly maintenance fee for having a checking or savings account. You may also have to pay fees to use their services such as taking money from an ATM not owned by your bank, making transactions with your credit or debit card in countries outside the country your bank is in, or receiving money deposits. There may also be account-related fees for bill payment services, or for overdrafts and nonsufficient funds in your account. Another example is credit card fees. customers usually pay an annual fee to open and use a bank’s credit cards. There are also usage-based fees that describe cash advances, balance transfers, late payments, or exceeding the credit limit. In addition to late fees, making a payment 60 days or more after it’s due could also lead to a penalty annual percentage rate or APR. Another way banks make money is through loans and service fees. Banks may also ask for fees when they issue loans or sell other financial products such as an insurance policy. Some banks will issue loans and then sell the loan to another financial institution instead of collecting interest from the borrower. Lastly, banks can also make money whenever you use the bank’s debit card or credit card to make a purchase. Merchants pay what’s called a merchant discount fee when they accept a card. With cards that are issued by banks such as Visa and Mastercard credit and debit cards and a portion of the commission fee goes to the issuing bank. This is called an interchange fee.