How Banks Make Money

It seems we all have a bit of a different view when it comes to banks. Older generations envision large concrete and marble structures with tellers safely placed behind bars. Young people are likely to view banks as virtual entities that facilitate online financial transactions.

The term “bank” is a general term that most frequently refers to an institution that accepts deposits and lends money. The oldest bank in the world still operating is an Italian bank that has been operating since 1472. The oldest bank in the U.S. was founded by the future Secretary of the Treasury, Alexander Hamilton. Then, there was The Bank of New York, which now operates as BNY Mellon.

Banks have been around so long because they have a relatively simple business model. They make money with money. When you think about it, isn’t that something we should all be doing?

How do banks make money? They make money from what is known as the “spread” between the interest they pay on deposits and what they charge borrowers. In a simple example, if a bank pays depositors 2% interest and charges 10% on money it lends, the spread is 8%.

This is significant when you consider all the forms of lending banks offer. They provide home loans, business loans, car loans, construction loans, personal loans, and issue credit cards. Banks also earn income from investing cash in short-term securities like U.S. Treasuries.

Banks also charge a variety of fees adding to their income, including fees for checking accounts, loan origination fees, overdraft fees, credit card fees, and more.

Many don’t realize that banks are privately operated and, like any business, exist to make a profit. This also puts them in a competitive situation. This is why it is important to compare when considering a loan for personal or business purposes.

It is also important to compare business insurance programs before making a decision. Business insurance can vary widely in coverage and costs, and our independent insurance agents can assist you in finding the best value. Contact us today to discuss your business.