How Banks Make Money
With millions of Americans putting away millions of dollars, have you ever stopped to wonder who's paying all these banks to watch over all that money? Well... you are.
Key Takeaways
Banks cover these costs in three primary ways: fees, interchange, and loan interest.
One of the biggest fees banks collect is not paid by you but by the stores you shop.
Banks aren't investment vehicles, but they are a safe place to keep money easily available for paying bills and for your emergency savings.
If you're like most Americans, you probably have a bank account. Every time you collect a paycheck from your employer, you can put it in the bank for safekeeping. Handling all of the deposits, withdrawals, and other services banks provide comes at a cost. Banks cover these costs in three primary ways: fees, interchange, and loan interest.
Fees
Whether it's for overdraft or late payments, applying for a loan, commission fees and, of course, ATM fees banks can charge customers tons of fees. In 2016, Bankrate estimated that consumers paid an average of $4.57 every time they withdrew money from an out of network ATM. In 2015, the three biggest banks in the country made $6 billion from ATM and overdraft fees alone.
Interchange
One of the biggest fees banks collect is not paid by you but by the stores you shop. If you go to your local deli for a sandwich and pay with card, the deli is charged an interchange fee. Some of that fee is paid to the deli’s bank, but most of it is paid to your bank. If stores want to accept debit or credit card payments, they must pay the price of the interchange.
Loans
When people put money in the bank, it doesn't just sit there waiting for them to take it back out. Banks use this money as a way to make money for themselves by offering loans. When someone wants to buy a home car or college education. They can go to a bank for a loan, and the bank will charge interest on that loan.
Let's say someone needs a sum of money to buy a car. They ask the bank for a loan and the bank will take money from its customers deposits to purchase the car. In exchange, that person will have to pay back the bank with 6% interest. This allows the bank to make thousands of dollars in profits. And when you consider that millions of people are taking out bank loans all across the country. That interest on all those individual loans adds up to billions of dollars.
Essentially, you're loaning your money to the bank so they can loan it out to other people. But just because the bank is lending your money out, doesn't mean you don't have access to it. Banks must meet reserve requirements and amount of funds the bank sets aside in case an influx of people withdraw money at the same time.
Banks aren't investment vehicles, but they are a safe place to keep money easily available for paying bills and for your emergency savings.