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How Do Banks Make Money?

How Do Banks Make Money

Banking is a lucrative profession – ever seen a rundown bank or one without the trappings of money? How exactly do banks make money? The short answer is you! Fees, penalties, ATM fees… you name it, banks love those extra charges. And they add up. But how else to banks make money?

 Your Money Makes Money

Your bank isn’t really holding your money, waiting for you to use it. Instead, they take your money and use it to lend to other people and then charge those other people money (interest). Remember Jimmy Stewart explaining how banks work in “It’s a Wonderful Life?” Same way, except now your deposits are insured by the FDIC against the Uncle Billys of the world.

All those credit cards, mortgages, car loans, and similar loans add up. Your little checking account giving banks the money to lend to borrowers and helping to build the bank.

Banks Charge Fees

Another infamous way that banks make money is to charge fees. Take a look at your bank account. You may be losing a fair amount of money in account fees – you pay for the privilege of having an account, using the account, not using the account – you name it, they’ll find a way to take a bit.

ATM fees are deadly.  If you are traveling or can’t immediately find your bank’s ATM, you’ll pay for the privilege of using ATMs. The charges may seem minimal at $3, but they can really add up.

Penalties include late fees, overdraft fees, and whatever bankers can dream up. Did you know that your checks do not clear in the order that they come in, but in the order that makes money for banks? Let’s say you have $100 in your account and accidentally write one big check for $75 and several little checks that total $60. If these come in on the same clearance period, the check for the largest amount is covered, and as many of the little ones are bounced as possible. You either get to pay overdraft fees or returned check fees for the others. If the bank was on your side, they would try to clear the smaller checks first and save you those fees. But this tactic makes banks lots of money each year!

Commissions for stock trading or investing through your bank can be higher than through an independent investment service. It is easier to have all your banking and investment at the same place, but the commissions can add up.

And finally, banks make money through applications for loans. “Origination” fees are those that the bank charges for drawing up the paperwork. These are pretty much unavoidable if you are taking out a loan but try not to have it rolled into the principal of the loan. You’ll pay a lot more in interest than the origination fee’s initial amount.

How Much Do Bankers Make?

Looking online gives are huge range. Some of the averages include everyone who works at the bank and since tellers are not particularly well paid, it brings the average down. And, it depends on the size of the bank.

Final Word

Banks make money off you and your account though fees, penalties, loan application fees and commissions. Take a look at your bank fees and consider other options. You may be able to save  by switching banks.