Banks are one of those institutions that earn handsome revenue. But how do they earn such handsome revenue? It’s good to investigate this query. Whether you’re planning to start such a business or want to add to your knowledge, learning about how banks make money is necessary. Though the methods may be different, the underlying concept behind how they earn is essentially the same. Banks use the money of the depositors and lend them to the lenders on certain interests. This precise guide will break down how do banks make money?
However, banks use different methods to make money. Based on the methods that banks use to generate money, one can divide the money-generating businesses into the following categories.
- Capital markets assets
- Interest money
- Fee-based money
Let’s go through all these money-generating methods in detail.
How Do Banks Make Money?
1- Capital Markets Assets
Capital markets assets are one of the major methods that banks use to generate money. They provide their services to different agencies, companies, and corporations. This method suits those who need assets to run their businesses. They have to return the funds out of the capital that they earn with the bank funds. Banks have named such loans or funds differently. Here are some names that banks use for capital fundraising funds.
- Underwriting funds
- Sales and trading funds
- Merge and Acquisition Advisory
It is the main reason how do banks make money. The banks provide certain brokerage services that assist the customers to reach out to different services of the banks. This fundraising method is the same as private equity. Different teams help the organizations and corporations to reach out to bank policies. Also, such teams perform the task of underwriting. Moreover, they are to assist the merge and acquisition services between the customers and banks.
This is a remote method of fundraising for banks. They offer capital services for certain deadlines, however, the deadlines may fluctuate sometimes. If the activity goes on smoothly, the banks earn handsome revenue. However, if the money flow is disturbed, the banks may suffer certain losses too.
2- Interest Money
Though capital market income supports the banks to grow their funds, interest is the major source of income for bankers. In this method, the banks take money from certain depositors who have excessive money to deposit in the banks. As a return, the bank may compensate him or her with a certain amount in the form of interest and security fees. The same money is lent to those who need money. But the interest on the lent money will be higher than compensation given to the depositors.
The banks give a deadline to the lenders to return the money. If the lender repays the money with interest within the deadline, it’s okay. In case, the lender doesn’t meet the repaying deadline, he may be charged a certain additional fine too. This is how interest income helps the banks to raise their funds.
3- Fee-Based Assets
Fee-based income is also a major source of income for bankers. This is the main way how do banks make money. Banks charge different fees from those who take their services. When someone wants to open an account, he will be charged the account opening fee. Then the bank will charge a certain monthly or annual fee to keep the account open. Some other fees may include credit card fees. Moreover, banks charge high fees for their different services. Here are different paid services that banks offer:
- Checking account fees
- Investment management funds
- Savings account fees
- Custodian charges
- Mutual fund fee
- Credit cards charges
Different banks offer lots of services to their customers. All their services help in effective money management. However, out of all the methods, the fee-based method is the most stable. As interest rates and capital markets services may suffer over time, the fees are a potential source of income for banks.
Where do banks put their money?
The depositors deposit their money in the bank to keep them safe for a long time. The banks handle this money via two methods. First, they can lend this money to those who need money. In this way, they earn via interest. Secondly, they may invest in different small businesses, derivatives, fuel extraction, securities, mortgages, and many other businesses.
Where do banks invest their money?
There are different ways to see where your bank invests your money. Banks can invest their money in lots of small businesses. Some businesses may include fossil fuel investments, investment in derivatives, mortgages for different veterans, and solar forms also.
Banks are the major processor of money that play a great role in stabilizing the assets in any society. But it’s good to learn how do banks make money. They take money from those who have enough money to deposit and may compensate them with some revenue. The same money is lent to needy persons with higher interests. This is how banks earn huge revenue.
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