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 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. However, those are just some basic ways that every typical bank uses. Looking deeper into bigger banks that don’t give out credit cards as much such as JP Morgan, things will start to look different. They compete internationally with a broad range of banks, brokerage firms, investment banking companies, hedge funds, commodity trading companies, private equity firms, insurance companies, and investment managers.
Looking at the picture above, it can be seen that only a small percentage of JP’s profits come from credit cards. JP Morgan's Consumer & Community Banking segment provides various services to consumers and businesses such as deposit and investment products, cash management, payment solutions, mortgage origination and servicing, credit card issuance, and auto loans. On the other hand, their Corporate & Investment Bank segment provides investment banking, brokerage services, and treasury and securities products and services to corporations, investors, financial institutions, and governments. Next, JP Morgan's Commercial Banking segment offers in-depth financial solutions, including lending, payments, investment banking, and asset management products to clients in all types of businesses and corporations along with the local governments. Now let's take a look at America’s second-largest bank by assets after JP Morgan which is Bank of America.
The Consumer Banking segment provides different credit, banking, and investment products and services to small businesses and consumers. These can be from traditional savings accounts and IRAs to credit and debit cards, residential mortgages, and loans. In Quarter 4 of 2021, Consumer Banking accounted for 37% of total revenue and about 41% of net income. The segment generated the most revenue across all segments. The Global Wealth and Investment Management segment provides financial advice, brokerage, banking, and retirement products to clients with large amounts of investable assets. This section represented about 22% of total revenue and 16% of net income for the same quarter. Next, Bank of America's Global Banking segment offers lending-related products and services, including underwriting and advisory services which means determining how risky an investment is as well as other investment banking products. The customers in this segment include middle market companies, commercial real estate firms, financial institutions, and corporations of various sizes. The segment accounted for 25% of revenue and 35% of net income. Lastly, The Global Markets segment provides sales and trading services along with research services to institutional clients, including financing, securities clearing, settlement, and custody. The segment makes up about 16% of all revenue and 9% of net income for the quarter. Next, we can look at America’s third biggest bank, Wells Fargo. Wells Fargo officially divides its operations into three categories: Wealth and Investment Management, Wholesale Banking, and Community Banking. Wealth and investment management services business clients and high net worth customers by offering them wealth management services, as well as investment and retirement products. Some of these services include financial planning, credit, and private banking. Wells Fargo's wholesale banking division is based on the financial needs of America’s economy and global businesses. There are 13 different business operations that are in this category including business banking, corporate banking, commercial real estate, insurance, and credit risk. Lastly, Community Banking operations service retail and small business clients with their everyday banking needs. Some of the services include checking and savings accounts, loans, and mortgages. The bank usually serves these clients in its branches and by its ATMs.