How Do Banks Make Money? Banks and money are both words that go hand in hand. “What is money?” and “how is it created or generated?” are questions that come up when we think about how do banks make money.
To become wealthy, it is essential that you understand how banks make their money and how it is created. This way you will increase your chance of financial success. You are of course familiar with your part of the process, which is to simply to get money.
You are acquainted with depositing or withdrawing from the bank. Or you may have taken out a loan. What happens after that? Here we will step behind the scenes and show you how do banks make those monies. These concepts are simpler than you think!
How Do Banks Make Money?
Banks make money in predominantly 3 ways. These are fees, Net interest margins, and Interchange. Here we will discuss how is money created via these three methods:
Once you have had any kind of interactions with the banks you would have paid fees to use your account.
Here are some of the fees that you would have encountered:
Monthly Service Fees Or Maintenance Fees-
These are the regular charges that need to be paid for having your account.
Minimum Deposit Limits-
You will have to pay this fee if your account falls below the minimum deposit requirement.
Withdrawal Penalty Fees-
If you withdraw more times than you should. You will be penalized.
Once you have an ATM card, there will be fees attached to it.
This is the penalty that you incur if you make a payment that exceeds the amount that is in your account.
Returned Deposit Fees-
Another answer to how do banks make money is the collection of returned deposit fees. This is the fee that you pay if you deposit a cheque that is no good, meaning there are not enough funds in the account to cover the amount. It is also known as a bounce cheque fee.
Lost Card Fees-
If you lose your ATM or Credit card, you are not going to get the replacement card for free. You will be charged.
Foreign Transaction Fees-
The bank makes money when you use your ATM cards abroad. Shopping with your ATM cards when you are on vacation is extremely convenient but there is a cost.
Paper Statement Fees-
There are people and businesses who prefer to receive a paper statement. Even though most people prefer electronic copies of their statements. As you would expect there is a cost attached to a paper statement (paper, ink, etc).
The banks and money collection factor also comes into play if you do not use your account. It is also known as a dormancy fee. You will be charged this fee, if you don’t make at least one deposit and/or withdrawal a month.
Excess Activity Fees-
This is obviously the reverse of the previous fee. This is applicable to some savings accounts. This fee is usually in the fine print of your savings account agreement. If you exceed the number of withdrawals, your bank will charge you a fee. Yet another way that the bank makes money.
You may think that these fees are nominal. However, think of the number of customers that each bank has. Each client will have to pay at least one or more fees. These fees add up and help to contribute to the bank’s revenue.
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How Do Banks Make Money –
Net Interest Margin
Banks and money as you know go together. The relationship between you and your bank is mutually beneficial. You as a customer deposit your money into the bank. That money is then used to provide loans to other clients. The loans that customers typically require are for homes, cars, and tuition to name a few.
Of course, banks do not facilitate loans for free. How is money created for the bank? By charging interest rates to its customers.
This interest is how banks make money. It is the revenue that they collect. Some of this interest is redistributed to customers as interest earned on savings or chequing accounts.
After this money is paid to the customers, the money that remains belongs to the bank. This money is called the net interest margin.
As you can tell an integral part of banks and money is the loan facility. Here is a list of the loans that the bank uses to earn its money:
Unsecured Personal Loans-
These loans are quite straightforward. You do not require to put up any collateral to obtain the loan. Your assets are what the banks consider collateral. That would be your house, land, or car. Since these loans are unsecured, the bank usually earns a substantial amount of interest.
Secured Personal Loan-
In this banks and money scenario, you offer collateral. So, the bank has something to hold in case you are unable to pay your loan. These interest rates are relatively low. So, the bank does not make as much interest in these types of loans.
You can get this type of loan if you have a car. You are allowed to borrow up to about 50% of your car’s value. Of course, there is a chance that your car could be repossessed. Another banks and money earning opportunity that brings in revenue.
This is the money that the bank makes when you use a debit or credit card to make a purchase in a store. The store has to pay an exchange fee for this transaction.
Some of the fee goes to your bank and some of it goes the store’s bankers. This fee is charged to cover the cost of debit and credit transactions.
Interchange charges can vary from bank to bank. However, they maintain a basic structure. They are usually a flat fee plus a percentage of a transaction.
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