Banks primarily make money through the difference between the interest rates they pay on deposits and the interest rates they charge on loans, known as the interest rate spread or net interest margin. They borrow money from depositors at a lower interest rate and lend it out to borrowers at a higher rate, profiting from the difference
. Additionally, banks earn income from various fees charged to customers, such as account maintenance fees, overdraft fees, loan origination fees, and interchange fees from debit and credit card transactions
. Banks also generate revenue through other financial services like investment banking, wealth management, financial advice, and investing customer deposits in securities
. Moreover, banks operate under a fractional reserve system, which allows them to lend more money than they hold in deposits by keeping only a fraction as reserves. This lending process effectively creates new money in the economy and expands the money supply, further enabling banks to earn interest income
. In summary, banks make money by:
- Lending deposited funds at higher interest rates than they pay to depositors (interest rate spread).
- Charging fees for various banking services and transactions.
- Offering financial products and advisory services.
- Creating money through lending under the fractional reserve banking system.
This combination of interest income, fees, and financial services constitutes the core of how banks generate profits
