How Do Banks Work And Earn Their Money?

how do banks work earn money banking business model

Big banks make a ton of money — we are talking more than $100 billion a year.

How do banks make so much money? If you ever pondered this question you have come to the right place. Here we outline exactly how big banks make money.

How do banks work? Keep reading to find out more about banking! 

How Do Banks Work? They Charge You Money

Simply put banks are kept in business by charging you money to use their services. You may not realize it but you end up paying the bank a lot whenever you use an ATM or apply for a loan. 

Here is how banks function:

They Charge Loan Interest

One of the ways banks make money is through interest from loans. You may not realize it but interest adds up. Most loan interest rates range from 5% to 36%.

In fact, the average person pays more than $5,000 in mortgage interest. For an auto loan, the average interest is over $800, for a credit card it is $800, and for student loans, the average interest is over $600. 

When you take into account how millions of people paying interest every year, a big bank can easily garner billions of dollars a year.

They Charge Fees

Yes, fees are annoying but they are one of the things that keep banks in business. One of the ways they collect fees is through account fees. While most bank accounts are free to open and use, some come with monthly operation fees. 

Another type of fees banks use to make money is ATM fees. Although this fee can be waived if you use your bank’s ATM, there are times when this isn’t an option. So, when you use an ATM outside of your bank that costs a fee — typically ranging from $3 to $9. 

One other fee banks notoriously charge is an overdraft fee. In fact, banks make over $11.45 billion in overdraft fees. Overdraft fees vary from bank to bank but they usually are around $35. 

Many argue that overdraft fees are a shady practice done by banks to make money. However, there are ways to avoid them. Most banks have an overdraft protection option that rejects a transaction when there isn’t enough money. 

Application fees are another way banks make money. Whenever someone applies for a loan, they are charged an application fee. Also, the application fee gets tacked on to the principal of the loan, meaning you will pay interest on it. 

To avoid paying a lot of money to your bank, find a bank that doesn’t charge outrageous fees.

Bank On It

How do banks work? Banks make money by charging fees and interest on loans. These banking fees and interest add up to billions of dollars a year.

Banks have been getting a lot of backlash and criticism for their practices. However, keeping your money in a bank is a lot safer than stashing it in a shoebox or under your mattress. Banking is better!

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