Banks sell products and services just like all other businesses. As their main services, banks offer to ensure the safety of money, precious metals and security of transfers, easy access to funds and the possibility of investing them at interest in order to minimize your losses from inflation.
Despite the rapid digitalization of the world, which opens up new opportunities and business models for the financial sector, as well as strong market fluctuations, the banking sector is still incredibly profitable, with many new physical banks opening every year.
Banks can make a profit by investing your money, charging account maintenance fees and interest on lending to individuals and companies.
The three main sources of profit for the bank are bank fees (commissions), net interest margin and interchange fee. Let’s look at them in more detail.
Banking fees
This is the main factor in the bank’s profitability. You can save money on many of them or simply refuse when signing the contract, but some commissions may still arise. Here are some of the examples:
- Account maintenance fee
- Overdraft fee
- Early withdrawal fee
- Account inactivity fee
- Commissions of third-party ATMs
- Loan late payment penalties
- Card loss fee
- Wealth management fee
At the same time, in order to cope with competition from fintech and Internet banks, including crypto banks, some fees of classic banks are becoming a thing of the past.
Net interest margin
The bank uses depositors’ money for lending. When you deposit your money into a bank account, you give the bank permission to use your money for that purpose.
Net interest margin (NIM) is the difference between how much the bank earns through lending customer funds and the interest it returns to them based on their account balances.
That is, income is generated by interest rates on loans. The bank shares a small percentage of this income with you as a reward for helping you invest, and thus your contribution grows according to the terms of the deposit.
Banks are limited in their risks. In addition, large banks are usually insured by the state. Even though your money is on someone’s loan most of the time, you still have full access to the entire amount, because the bank is required to keep a minimum amount on hand at all times, which is determined by the so-called reserve requirements.
Interchange
The seller always pays a commission to the bank when you pay with a credit or debit card issued by this bank. This fee is charged for possible risks, including fraud, as well as payment processing costs. Commissions can be as high as 3%, depending on the country and type of goods, but they are usually much lower.
In addition, if you pay with a credit card, then the commission for the seller will be, for example, 1.5%, but when paying by debit card it will be only 0.5%. Therefore, the bank can afford to provide various rewards and bonuses for credit card holders.
To avoid loss of income, interchange interest is included by sellers in the cost of goods.