How do banks make money off you?

Created on 19 Apr 2019

Wraps up in 3 Min

Read by 4.2k people

Updated on 19 Oct 2019

Often, we see banks keeping our money safe and paying savings interest rate or a fixed deposit interest rate to all its customers. So, if the banks keep giving interest to everyone on the money deposited with them, then, how do you think these banks make money?

Well, the source of revenue for the banks are many, which have been listed below:

  1.     Earnings from interest charged on loans: One of the most preferred media of making money by banks is to lend money as loans at a higher rate of interest. Example: Suppose, person X deposits Rs. 10,000 in the bank account. So, he earns a savings interest rate of (say) 4% per annum. The bank lends the money saved by person A to another person X, who has applied for an educational loan. Now, the banks earn an interest of Rs. 6.62 % per annum on the money lent.

So, as you can see the interest earned by the banks is a way too more than the interest paid to its customers on depositing money. And, the banks make a reasonable rate of interest from thousands of money borrowers amounting to a good source or revenue.

  1.     Earnings from credit cards: These days every individual prefers to carry plastic money rather than real money. Credit cards are issued by the banks to its customers against which they charge some fee. The banks charge an interest fee from credit card holders if they fail to clear their bills by the end of the month. So, the banks charge interest on the borrowed amount of money.

Apart from this, the credit card holders are charged some annual fee and late fee by the banks. Though the prices earned amount to a small source of income, yet, it does contribute significantly by summing up the revenues derived from lakhs of customers.

Another source of income for banks is from a certain percentage of money paid by merchants to the banks, each time the customers use their credit cards to pay. The merchants pay about 1.75% of the transaction value to the banks.

  1.     Charging customers on specific products: The banks also charge the right amount of money for the issuance of bank lockers. Moreover, each year the locker holder has to pay a certain sum of money as locker maintenance fee to the bank. Other than this, the banks also charge a nominal fee in clearing the cheques, or as an overdraft fee.

The banks also generate money from their core deposits which are savings account which is availed by almost each one of us. Banks also collect a fee of 300 to 500 Rs for issuing a new ATM card or reissuing the ATM card if it is lost.

  1.     The Banks make money from trade: Banks make money from the free-flowing business by collecting commissions.

So, these are some of the ways in which banks earn an excellent revenue consistently over a while. The revenues collected from interests and commissions are way too much then the money paid as interest to the customers. The net difference amounts to a good source of income for the banks.

The interest paid to customers in fixed deposits are not at all well-paying, so if you want to earn lucrative returns on your invested money, then you must look at investing your money in equities.

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Ayushi Upadhyay

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A Keen Learner. Tiny, brainy, and studious, this quiet one stays in her zone until she pops. And once she does, boy, are her comebacks snappy! There is no financial question that she can't answer through her magical blog-writing. 

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