How Do Banks Make Money?

Banks take money and lend money … money’s trading hands all around. Ever wonder how banks actually make money from that money?  

Because they make a lot. Big banks rake in billions of dollars each year. For example, Bank of America made almost $18 billion in 2020.

Where’s all the money coming from? In part, by charging you things like monthly maintenance fees, interest fees on loans, and overdraft fees. 

Here are the most common ways banks generate revenue — and tips to help you keep more of your money in your own pocket. 

Top ways that banks make money

1. Fees

If you’re a customer of a traditional bank, you’re no stranger to fees. Banks make a fortune off of fees — especially the small ones that consumers tend to overlook. At scale, though, fees can add up to a significant amount for the bank. 

Here are some of the most common fees that banks charge.

Maintenance fees 

Many checking accounts and savings accounts come with monthly maintenance fees, which typically range from $5.99 to $25 each month. 

This may seem like a small amount, but fees can take a big chunk out of your finances over time. 

For example, a monthly maintenance fee of $25 is $300 a year. Over a five-year period, you will have spent $1,500 on fees! If you had otherwise invested $25 a month in the stock market during that same time, at the end of five years you’d have almost $1,800.  

The good news is that many banks allow you to bypass maintenance fees by keeping an average daily balance or linking a certain number of monthly direct deposits. So if your bank typically charges a monthly maintenance fee, read the fine print to learn how to avoid it.

TIP: There are plenty of no-fee checking and savings accounts. Switching banks is an easy way to avoid monthly fees.

Overdraft fees

Overdraft fees occur when you make a purchase without having enough in your account to cover the cost of the transaction. If your bank charges them, you may get slapped with a hefty fee of $20 to $40. Some banks also charge a daily overdraft fee from $5 to $10 for each day that you have a negative account balance.

This is another top moneymaker for banks. In fact, banks collected over $30 billion in overdraft fees from consumers in 2020. So it’s definitely something to watch out for. If you make a misstep, you may wind up paying the price. 

If you are not a repeat offender, you can usually negotiate overdraft fees. Call the customer service department and speak nicely to the agent. Ask them to review the transaction and if they have any ability to waive the fee. Banks often give you a freebie or two. However, if you consistently violate an overdraft policy, you’ll probably have to pay the fee. 

Failure to pay an overdraft fee could result in the bank shutting down your account. The bank may also send your outstanding balance to collections if you don’t pay. On top of that, you could wind up getting denied the next time you go to open a checking or savings account with that institution. 

TIP: If you tend to overdraft your account, look for a provider that offers overdraft protection or that simply declines a transaction rather than letting the balance go negative.

Interchange fees

Another way that banks make money is through interchange fees, which are collected when you make a transaction at a retailer using a debit card or credit card. 

Banks charge the merchant interchange fees, and the cost is typically split between your bank and the one that the store uses.

As a consumer, you don’t really have to worry about interchange fees. You might run across them at smaller stores that have card minimums to cover interchange fees. For example, if you go to buy a pack of gum at a gas station with a debit card, the store may decline your transaction or ask you to buy more stuff because they wind up having to pay too much in fees.

TIP: Some small businesses are willing to offer slight discounts for cash-paying customers. This is because the business is saving a few points on the interchange fees. When it comes to discounts, you can’t get what you don’t ask for!

2. Net interest margin

Net interest margin is the profit that banks make from interest earnings.

OK, so what’s that actually mean?

It all starts with loans. From student loans to mortgage loans to car loans and personal loans, there are many ways that people can borrow money from banks. To cover the costs of lending, banks charge interest fees on the loan amounts. 

When banks collect those interest fees from borrowers, they sometimes pay a percentage back to customer deposit accounts (think checking and savings accounts) in the form of an annual percentage yield (APY). The bank keeps the remaining amount of interest — and this is called net interest margin. 

There isn’t anything illegal about this. It’s just part of how banks make money. It’s also largely why the interest rates you can earn from traditional banks are so low. Consumers are usually among the last to get paid. 

TIP: A key to financial freedom is minimizing how much interest you pay to banks. The smaller and fewer the loans you take out, the less money you’ll lose in interest fees.

3. ATM fees 

Many banks charge $3 or more for out-of-network ATM fees, so when you’re out and about, be careful about which ATM you use. 

Some banks reimburse customers for third-party ATM fees, while others don’t give you any way to avoid them. Your best bet is to plan ahead and get the cash you need from an in-network ATM. 

Generally speaking, most big national banks charge fees for using third-party ATMs.

TIP: If you frequently need ATM access, look for a bank or cash management account that reimburses for ATM fees. There’s a growing trend among newer, online-only banks that do this.

Why online banks and credit unions offer better rates

If you’re shopping around for a bank, you’ll find that online financial institutions typically offer better rates than traditional banks. 

For example, online banks often provide high-interest savings accounts (HYSAs) that pay more to depositors than traditional banks do. Or, sometimes they offer better rewards for spending activity, like Current Bank.

The main reason for this is because online banks typically don’t have to pay much, if anything, for real estate. And since they can avoid brick-and-mortar locations, there are fewer employees to pay, and less security and physical maintenance to worry about. As a result, they’re able to give more back to the consumers who deposit money with them. 

On the other hand, credit unions are community-owned nonprofit organizations. Usually, the majority of the returns go directly back to consumers in the form of higher interest rates on deposits and low interest rates on loans. 

You usually have to be a member of a specific organization like a church group, school, or community to access a credit union. If you have access to one, you should strongly consider taking advantage because they usually offer much friendlier rates than traditional banks. Some credit unions let their members sponsor other members who wouldn’t qualify on their own, such as spouses.

Frequently asked questions

How can I avoid monthly maintenance fees on my bank account?

Check with your bank. There are usually various ways to avoid paying the fee, such as maintaining an average daily balance, linking direct deposits, or having a total amount of assets in associated accounts.

If you don’t like paying banking fees, look for a bank that doesn’t have them. Otherwise, you may be required to pay fees for checking, savings, or even certificates of deposit.  Every bank is different. 

What are commercial banks?

Commercial banks — or retail banks — are financial providers that operate as for-profit entities. They make money by collecting interest on bank loans, and collecting late fees, overdraft fees, and monthly maintenance fees. 

Some commercial banks are also investment banks and massive financial services companies (e.g., J.P. Morgan Chase and Citibank). 

Do banks offer brokerage services?

Some of them do. But you’re probably better off working with a dedicated brokerage provider than with a traditional bank.

Check out our list of the best stock brokers.

Are all account fees bad?

It depends on the service that your bank is providing and your personal situation. In some cases, it makes sense to pay small fees because you are paying for convenience and saving time.

Still, you should try to avoid them. Shop around and try to find a bank that doesn’t charge fees. There are many Federal Deposit Insurance Corporation (FDIC) supported institutions to choose from — and it won’t hurt your credit score to switch banks. 

The Bottom Line 

Remember that the vast majority of banks are for-profit entities, and their primary goal is to earn a profit. Keep this in mind the next time you notice a fee you didn’t expect, and don’t hesitate to contact your bank or switch providers if you’re not happy.

Here’s to finding a banking partner that meets your needs without nickel and diming you in the process. 

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