# data[].attributes.headline
(Money Under 30) Banking 101: How do banks make money?

# data[].attributes.subject
(Money Under 30) Banking 101: How do banks make money?

# data[].attributes.body
https://www.moneyunder30.com/how-banks-make-money

# data[].attributes.body
https://www.creditkarma.com/money/i/how-do-banks-make-money

# data[].attributes.attachment_link.readable_text
Editorial Note: Credit Karma receives compensation from third-party advertisers, but that doesn't affect our editors' opinions. Our third-party advertisers don't review, approve or endorse our editorial content. It's accurate to the best of our knowledge when posted.

Advertiser Disclosure

We think it's important for you to understand how we make money. It's pretty simple, actually. The offers for financial products you see on our platform come from companies who pay us. The money we make helps us give you access to free credit scores and reports and helps us create our other great tools and educational materials.

Compensation may factor into how and where products appear on our platform (and in what order). But since we generally make money when you find an offer you like and get, we try to show you offers we think are a good match for you. That's why we provide features like your Approval Odds and savings estimates.

Of course, the offers on our platform don't represent all financial products out there, but our goal is to show you as many great options as we can.

One of the many purposes of banks is to give people and businesses a way to store funds and access credit. But a lot of financial institutions also focus on profits and making money from the same customers they're serving.

Understanding how banks make money can help you decide what to look for in a new bank.

How do banks make money?

The ways that traditional banks make money can vary depending on the type of bank and its target customers.

Community banks primarily make money from the interest they earn lending money to local residents and small businesses. The money comes from depositor funds held in several types of bank accounts. While many large banks also make most of their income from interest, they earn a larger share of their revenue from non-interest sources than community banks do.

Large banks are also often made up of different divisions that focus on various types of customers and services. For example, their commercial banking or retail banking divisions may offer traditional bank services, such as deposit accounts (like checking or savings) and issue personal and business loans. However, their investment banking divisions may help large corporate and government clients raise money, manage their money and invest the bank's money.

How banks make money with interest

Many banks make the majority of their money from charging interest on loaned funds, such as home loans, auto loans or personal loans that are issued to consumers. Many banks also offer loans to small and large businesses. Customers who have a credit card and revolve a balance may also pay interest on their credit card debt.

How banks make money with fees

Banks can also make a lot of money on banking fees. These can range widely depending on the type of account or service you have with the bank, and may include ...

Bank account fees - Banks may charge you a monthly maintenance fee for having a checking or savings account. You may also have to pay fees to use bank-related services, such as withdrawing money from a non-bank ATM, to make transactions with your credit or debit card in countries outside the U.S. or to receive a money order or cashier's check. There may also be account-related fees for bill payment services, or for overdrafts and nonsufficient funds in your account.

Credit card fees - Cardholders may pay an annual fee to open and use the bank's credit cards. Usage-based fees - for cash advances, balance transfers, late payments or exceeding the credit limit - are also common. In addition to late fees, making a payment 60 days or more after it's due could lead to a penalty annual percentage rate (or APR).

Loan and service fees - Banks may also collect fees when they issue loans or sell other financial products, such as an insurance policy. Some banks will issue loans and then sell the loan to another financial institution instead of collecting interest from the borrower. The bank may still make money on the loan origination fee and sale, or could collect fees to service the loan.

Investment fees - Banks that offer investment services can also earn fees for managing clients' investments and brokerage services (a fee each time you buy or sell a stock, for example). Banks that create or sell mutual funds, annuities and other financial products may also earn commissions or fees from these sales.

How banks make money with interchange fees

Banks can also make money whenever you use the bank's debit card or credit card to make a purchase. Merchants pay what's called a merchant discount fee when they accept a card. With cards that are issued by banks (such as Visa and Mastercard credit and debit cards), a portion of the discount fee goes to the issuing bank. This is called an interchange fee.

Some banks also offer merchant accounts to businesses that want to accept debit and credit cards. They can then collect merchant processing fees from the merchant on its card-based sales.

Other ways banks make money

Banks have other ways of earning non-interest income.

Investments - In addition to earning fees and commissions on customers' investments, banks may be able to invest their own money.

Advisory services - Some banks also make money by acting as an adviser for other businesses. They may sell research or investment ideas to individuals and businesses. Entities may also hire the bank to help with raising money, public offerings, and mergers and acquisitions.

Commissions - Banks may have partnerships with insurance agents, brokerages, investment services and other businesses that pay them a commission to refer customers.

Next steps: Ways to reduce your banking costs

While you may benefit from the services that banks offer, you can also look for ways to save money by minimizing your banking costs.

Look for fee-free banking services. If you want a basic checking or savings account, look for banks that don't have minimum balance or monthly service fee requirements. Remember, though, that even with a fee-free checking account, there can be other fees - including ATM fees charged by third-party providers.

Don't opt in for overdraft services. Accepting your bank or credit union's overdraft services can lead to overdraft fees. Instead, aim to keep an eye on your balance and balance your checkbook regularly to avoid nonsufficient funds fees.

Understand what you're getting for your fees. Paying a fee for a service or product isn't a bad idea if you feel the benefits outweigh the costs. For example, credit card annual fees may be worth it if benefits from perks and rewards make up for it. But there are also many rewards cards, including travel cards, that don't have annual fees.

Beware of sales tactics. You may think of bank tellers as helpful customer service representatives. However, at some banks, they serve a dual function and are expected to act as salespeople as well. Tellers may try to get you to open other accounts at the bank to meet their sales quotas (remember the Wells Fargo fake account scandal).Banks can also earn commissions or collect fees when you buy investments or insurance products from the bank. If your financial adviser works for a bank, beware of the potential conflict of interest that may arise, particularly if your adviser works on commission.

Comparison shop when applying for a loan. One of your biggest banking costs may be the fees and interest you pay on a loan, especially if you're taking out an auto loan or mortgage. However, you can comparison shop when looking for a lender - you don't have to borrow money from your current bank.

Shopping for a loan won't necessarily hurt your credit, and you don't need to accept a loan offer when you're approved. Comparing offers from several lenders can help you find a loan with the lowest possible fees and interest rates.

In general, the less you spend on banking fees or penalties, the more money you'll have to pay off debt, build savings and invest for your future. While banks might also earn money by offering these services, you'll both be benefitting in the long run.

About the author: Louis DeNicola is a personal finance writer and has written for American Express, Discover and Nova Credit. In addition to being a contributing writer at Credit Karma, you can find his work on Business Insider, Cheapi... Read more.

# data[].attributes.attachment_link.description
Editorial Note: Credit Karma receives compensation from third-party advertisers, but that doesn't affect our editors' opinions. Our third-party advertisers don't review, approve or endorse our editorial content. It's accurate to the best of our knowledge when posted. Advertiser Disclosure We think it's important for you to understand how we make money.

# data[].attributes.headline
(Ben Hedges) How Do Credit Card Companies Make Money?

# data[].attributes.subject
(Ben Hedges) How Do Credit Card Companies Make Money?

# data[].attributes.body
https://www.youtube.com/watch?v=7D5LUWS9agE

# data[].attributes.attachment_link.title
How do Credit Card Companies Make Money? $$

# data[].attributes.body
I chose this picture because it breaks sources of a banks revenue - loan fees, mortgages, capital markets and asset management, services charges, and net interest income - into an easy to digest pie chart.

# data[].attributes.headline
What did you learn about your topic that surprised you the most?

# data[].attributes.subject
What did you learn about your topic that surprised you the most?

# data[].attributes.body
One thing I learned about how banks make money that surprised me the most is how easy it is for banks to increase the total money supply (without increasing the amount of physical cash in circulation), i.e. how they can easily turn a deposit of $1000 into a total amount of upwards of $10000 through fractional reserve banking.

# data[].attributes.headline
Provide a real-life example of how this topic is relevant or interesting for you

# data[].attributes.subject
Provide a real-life example of how this topic is relevant or interesting for you

# data[].attributes.body
I just recently got a credit card and have been researching on how to start building a good credit score early. I have also been looking into some investment services provided by my bank, such as mutual funds.

# data[].attributes.headline
If you could pass on your knowledge to a family or friend, what do you think is the most important thing to pass on?

# data[].attributes.subject
If you could pass on your knowledge to a family or friend, what do you think is the most important thing to pass on?

# data[].attributes.body
I think the most important thing to pass on would be the importance of paying loans and credit cards off. Loans and credit cards are big ways that banks make money due to very high interest rates - the sooner you pay off loans, the better, and it's always best to pay off credit cards before the payment is due so that you don't have to pay any interest.

# data[].attributes.body
This Padlet goes over the origin of banking; how banks create money; how banks make profit; and limitations to the profit they make.

# data[].attributes.body
https://www.youtube.com/watch?v=fTTGALaRZoc

# data[].attributes.body
Out of the over 30,000 banks worldwide, the top ten alone account for roughly $25 trillion USD alone. Banks started around the 11th century, and the word "bank" actually comes from the Italian word "banco", which translates to "bench" (where currency exchange would typically happen before banks existed).

Today, banks are typically in the risk management business (e.g. lending credit - some people will end up defaulting, so it's a calculated risk of who they lend to). People store money in banks and in turn receive a small amount of interest. Banks then lend out some of that money at a high interest rate to make money.

Other sources of income for banks include accepting saving deposits; trading currencies; investing; and the credit card business. Many modern-day banks have abandoned the traditional role of offering long-term saving products in favour of high-risk short-term gains.

Many new models of providing financing are appearing - e.g. new investment banks (charge yearly fee, no commissions on sales); credit unions (provide same financial services as banks but focus on shared value rather than maximizing profit); crowdfunding (allows for risk to be spread over a very wide array); and microcredits (many small loans handed out in developing countries).

# data[].attributes.body
I chose this video because it provides a short history of banking including its origin; the video goes over a bit about how banks make money; the video mentions how banks have changed in modern times; and lastly, the video also talks about new models of how financing can be provided.

# data[].attributes.headline
(Five Minute Finance) How Banks Create Money

# data[].attributes.subject
(Five Minute Finance) How Banks Create Money

# data[].attributes.body
https://www.youtube.com/watch?v=O5DaC1Ujrrg

# data[].attributes.body
Money gets deposited into a bank account, where it earns a small amount of interest. Banks then take the deposited money and lend it out to businesses and people at a high interest rate. The difference between the interest charged and the interest they pay to depositors is the bank's profit. In order to create more money, banks need to attract more deposits. More deposits = more loans.

Banks use fractional reserve banking. The banks need to keep a certain percentage of deposits and then are able to loan out the rest. The reserve percentage is mandated in some countries (e.g. in the USA the reserve percentage is 10%). In Canada, there is no set reserve requirement.

The main limitations to banks creating money are profitability (when making a loan, the bank must take into consideration the cost of running the bank and the loss if the customer is not able to pay back the loan) and capital limits (amount of money banks are required to keep in the bank instead of distributing).

# data[].attributes.body
I chose this video because it goes a lot more in depth about how banks make money than the first video does.

This video also goes into a little bit of detail about limitations to the amount of money that banks can make.

# data[].attributes.headline
(Khan Academy) Money Creation in a Fractional Reserve System

# data[].attributes.subject
(Khan Academy) Money Creation in a Fractional Reserve System

# data[].attributes.body
https://www.youtube.com/watch?v=gd8B-zrMSYk

# data[].attributes.attachment_link.title
Money creation in a fractional reserve system | Financial sector | AP Macroeconomics | Khan Academy

# data[].attributes.body
Each new deposit into a bank by a customer creates both an asset and a liability for the bank. The bank gets money in their reserves (asset), however the depositor could come and ask for all of that money at any given time (liability).

The bank then creates new assets by keeping a fraction of the money deposited and then loaning out the rest of the money at a high interest rate (fractional reserve banking). Fractional reserve banking helps increase the total money supply without actually increasing the amount of physical cash in supply. For example, Person A deposits $1000 into Bank 1. Bank 1 then keeps $100 of the $1000 and loans out the other $900 to Person B. Person B deposits that $900 into Bank 2. Bank 2 then keeps $90 and loans out the remaining $810 to Person C, etc. That original $1000 has now turned into $2710.

The total amount of money that can be created is (amount deposited)x(1 / percentage kept in reserve). For example, if $100,000 is deposited and 10% is kept in reserve each time, a total amount of roughly $1M can be created.

# data[].attributes.body
I chose this video because it gives more insight into fractional reserve banking and also talks about total monetary creation.

# data[].attributes.body
Banks who issue credit cards profit off of credit cards in many ways:

Credit Interest Charges
Calculated by (annual percentage rate / 365)*(amount due) per day. Also usually compounds per day, which makes credit card interest very profitable for banks.

Credit Fees
Payment late fees, cash advancement fees, foreign exchange fees, balance transfer fees, etc.

Merchant Fees / Payment Processing Fee
A portion of this fee goes to the credit card company (e.g. Visa); a portion goes to the bank which issues the card; a portion goes to the credit card processor; a portion goes to the merchant account provider; and a portion is sometimes paid to the payment gateway (e.g. Apple Pay).

# data[].attributes.body
I chose this video because it talks about how banks make money off of credit cards instead of talking about fractional reserve banking. The video explains all about the different ways banks make money off of credit cards, as well as how some of those fees get split up.

# data[].attributes.headline
(Canadian Bankers Association) Focus: Bank Revenues and Profits

# data[].attributes.subject
(Canadian Bankers Association) Focus: Bank Revenues and Profits

# data[].attributes.body
https://cba.ca/bank-revenues-and-earnings-profits

# data[].attributes.attachment_link.readable_text
When banks are profitable, they are stable. When banks succeed, the economy and communities prosper.

Fast facts

The majority of Canadians are shareholders in Canadian banks either directly through share ownership or indirectly through pension and mutual funds, including the Canada Pension Plan (CPP).

Canada's six largest banks paid $18 billion in taxes in Canada in 2022 to all levels of government.

The bottom line

When banks are profitable, they are stable. When banks succeed, the economy and communities prosper.

A profitable banking industry works for Canada and Canadians. Banks provide jobs directly and indirectly, create tax revenues, distributes dividend payments and donate to charities in Canada and worldwide. Profits also expand the capital base of banks, which in turn maintains the stability of the system, ensuring the safety and security of Canadians' deposits.

What is the difference between revenues and profits?

Revenues are generated from the selling of a business' products and services before expenses and taxes. Profit, also known as net income, is left after setting aside funds for credit losses and accounting for expenses and taxes. The six largest banks' net income in 2022 was $66.6 billion.

Where do bank profits come from?

Banks are involved in many business lines, such as personal and commercial banking, capital markets, wealth management and insurance, generating revenue from a variety of businesses.

This variety helps yield positive and stable financial results, which makes for a safe and secure banking sector that contributes significantly to Canada's economy.

Banks categorize their revenue into two broad areas based on how it is generated - net interest income and non-interest income.

Net interest income is generated from what is known as the 'spread'. The spread is simply the difference between the interest a bank earns on loans extended to customers and the interest paid to depositors and other creditors for the use of their money. Fifty-two per cent of bank revenue earned is net interest income.

Non-interest income accounts for 48 per cent of bank revenues. Banks earn this by providing a variety of value-added services, including trading of securities, assisting companies to issue new equity financing, commissions on securities and wealth management.

Added together, net interest income and non-interest income form total revenue. From total revenue, a number of items are subtracted, including expenses for its staff, locations, equipment and technology. Taxes must also be paid out of total revenues.

Net income (after expenses and taxes) is used, among other things, to:

Expand the capital base of the bank;

Make investments to improve the bank;

Pay dividends to shareholders; and,

Make acquisitions.

Who benefits from profitable banks?

Canadians do. The banking industry is a success story and its profitability is very important both to our economy and to individual Canadians.

Banks and their subsidiaries contribute significantly to job creation and to the Canadian labour market, employing more than 280,000 employees in Canada.

Canada's six largest banks paid $18 billion in taxes in Canada in 2022 to all levels of government.¹

The majority of Canadians are shareholders in Canadian banks either directly² through share ownership or indirectly through pension and mutual funds, including the Canada Pension Plan (CPP). Pension funds and RRSPs are some of the main beneficiaries of the billions of dollars that the banks pay in dividends each year.

Suppliers to the banks, including businesses of all sizes, all over Canada and the world. Banks made purchases from outside suppliers totaling about $24.3 billion in 2022.

Banks and their employees are also among Canada's top corporate donors and have a long tradition of community participation. Canada's charities and non-profit community groups receive multi-million dollar support from banks and every year thousands of bank employees at all levels donate their time and talent to charitable initiatives. These contributions help support a broad range of programs, particularly in the areas of education, the arts, youth, the environment, disaster relief and health care.

¹ CBA Tax Statistics, Estimates
² About half of the shares of the top six banks in Canada are owned directly by individual retail investors. Source: TMX Group/S&P Capital IQ

# data[].attributes.attachment_link.description
When banks are profitable, they are stable. When banks succeed, the economy and communities prosper.

# data[].attributes.body
The income of Canada's six largest banks was over $46B in 2019, and they paid $12.7B in taxes to the government.

A bank making profit equals a stable bank. Profits expand a bank's capital base, which in turn allows the system to maintain stable and ensure the security and safety of deposits.

The selling of products, services, and loans generate revenue. Net income is left after funds for expenses, taxes, and credit losses has been set aside.

Bank revenue can be sorted into two categories: net interest income and non-interest income. Net interest income is the difference between the interest a bank earns on loans and the interest paid to depositors. Net interest income accounts for approximately 52% of bank revenue. Non-interest income accounts for approximately 43% of bank revenue and comes from services such as trading, assisting in issuing new equity financing. and commissions on wealth management. Personal service fees account for the remaining 5%.

# data[].attributes.body
I chose this website because it gives figures for bank income and taxes paid. The article also gives insight into revenue vs net income and talks about the two categorizations of a bank's income and the approximate percentage of income from each.

# data[].attributes.body
The majority of a bank's income comes from fees (maintenance, credit card, ATM, foreign transactions, overdraft, interchange, etc.) and interest (mortgages, student loans, credit card debt, payday loans, etc.).

Income also comes from capital market services such as investment management and asset management. Capital markets services are diverse but inconsistent, hence why banks rely more on profit from interest and fees.

Banks offer two major types of services - investment services and commercial services. Commercial banking includes deposit accounts and loans; while investment banking includes finance and wealth advice and management for high-profile clients such as governments and large-corporations.

# data[].attributes.body
I chose this website because it explains the difference between commercial and investment banks. The website also lists out the different types of fees and loans.

# data[].attributes.headline
(Cannect) There’s nothing Canadian about Canadian banking

# data[].attributes.subject
(Cannect) There’s nothing Canadian about Canadian banking

# data[].attributes.body
https://cannect.ca/2018-canadian-banking-profits/

# data[].attributes.attachment_link.title
There’s nothing Canadian about Canadian banking - Cannect News

# data[].attributes.attachment_link.description
The big six Canadian banks have posted record profit in 2018 by diminishing the wealth of Canadians. Learn their tactics and how Cannect can help.

# data[].attributes.body
Canadian banks make more than $3.2K profit per household in Canada. High net interest margins results in more profit (net interest margin is the difference between interest paid to savings accounts and the interest earned on loans).

Banks have been decreasing the interest rate on savings accounts while also increasing interest rates charged on loans, resulting in an increased spread / margin.

For example, TD reported a net interest margin of 1.68% over 2017-2018 and credited their earnings growth partially to an increase in spread.

In 2018, Canada's six biggest banks made $45.5B, up 7.4% from the year before.

# data[].attributes.body
I chose this website because it mentioned the profit per household in Canada, which I thought was an interesting figure. The website also mentioned the term 'net interest margin' and explained what it is. Lastly, the website also mentioned the annual revenue for Canada's six biggest banks in 2018. the previous website I chose disclosed the revenue for 2019 and it was $500M more than the website four's figure for 2018.

# data[].attributes.body
Traditional banks make money from a variety of different sources depending on the type of bank and its target customers. Banks primarily make money on interest earned on loans lent to residents and businesses. The money lent out comes from depositor funds held in different accounts, such as savings accounts.

Large banks may also have different divisions, such as a commercial banking division, a retail banking division, and an investment banking division.

As stated in other summaries, banks mainly make money off of fees and interest. Banks also make money off of advisory services, commissions (partnerships that pay a commission if the bank refers customers), and investments.

# data[].attributes.body
I chose this website because it reiterates the different ways banks make money, and it also mentions investments and commissions.

# data[].attributes.body
I chose this picture because it organizes sources of income (loans, credit card interest, product fees, other products/services) and sources of outcome (interest paid to savings account, interest paid on money they borrow) in a very blunt and simple way.