If you wonder how banks make money, here’s the answer: They do so by charging money for providing services as well as financial products. Among the ways they profit are by collecting interest on loans and assessing fees for banking services.
Here, you’ll learn more about how banks make money, the different kinds of banks that offer services, and the kinds of fees you may pay as a customer. By knowing these details, you’ll be better able to choose the right financial institution for you and probably hold onto more of your cash.
What Exactly is a Bank?
In general, a bank is a financial institution licensed to receive deposits and make loans. Some banks also offer financial services, such as safe deposit boxes and currency exchange.
There are several different types of banks, and though they all generally provide similar services, each type has a few unique traits that can make it especially useful for certain types of customers and goals. Here are some of the most common types of banks.
Retail Banks
Traditional banks that serve the general public, such as Wells Fargo, Bank of America, and Chase, are retail banks. Their focus is to help people manage their personal wealth.
Retail banks are generally easily accessible, often having hundreds of branches across the country and they provide the most basic of financial services for regular use.
Commercial or Corporate Banks
These banks specialize in providing financial support and assistance to small and large-scale businesses. Many also have retail divisions as well.
Where a standard retail bank might only be able to provide small personal loans, commercial banks often have the capacity to provide larger and more substantial loans, as well as other services, to help support new and expanding business ventures.
Online Banks
These are institutions that provide financial services just like any other bank, except they do not maintain any actual storefronts. To apply for an account with an online bank, such as Ally, SoFi, or Synchrony, applications must be submitted online and the entire banking experience is primarily conducted remotely via an internet browser or app.
Because online banks generally don’t have the expenses that come with maintaining a storefront, they can often offer higher interest rates and lower fees than many brick-and-mortar banks.
However, because they don’t have storefronts, you typically can’t make cash deposits.
💡 Quick Tip: Typically, checking accounts don’t earn interest. However, some accounts do, and online banks are more likely than brick-and-mortar banks to offer you the best rates.
Central Banks
In many countries, banks are regulated by the national government or central bank. In the U.S., the Federal Reserve System is the central bank of the U.S. It consists of 12 Federal Reserve banks that stretch across the country.
These central banks are responsible for implementing monetary policy, maintaining the stability of the financial system, controlling inflation, and providing financial services to banks and credit unions. The Federal Reserve banks are essentially banks for other banks, as well as the government.
Investment Banks
Morgan Stanley and Goldman Sachs are examples of investment banks. These banks specialize in managing some of the largest and most complex types of commercial transactions, such as merger and acquisition activity, initial public offerings, or financing large infrastructure projects like building bridges. Investment bankers often work on deals that involve raising capital and acquisitions.
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How do Banks Make Their Profits?
With the wide variety of financial products and services that banks offer, they create many opportunities for revenue. Those revenue streams generally fall into one of three categories:
Interest
One of the primary sources of income for banks and financial institutions comes from interest collected on the various loans that they offer.
Banks use the money from their clients’ checking and saving accounts to offer loan services. They then charge interest on these loans (based on the credit history of the borrower and the current federal funds rate). Banks then profit from the net interest margin. That’s the difference between the higher interest income charged for their loans and the lower interest paid out to clients on their bank accounts.
Interchange Fees
When people use their bank-issued credit and debit cards at a store, that store typically pays a processing fee, known as an interchange fee.
These fees are paid by the merchant’s bank to the consumer’s bank for processing a card payment. This fee is to help ensure security, payment, fraud protection and a speedy transfer of funds, and is typically a small flat fee plus a percentage of the total purchase.
Interchange fees help explain why some establishments maintain minimum purchase amounts for credit or debit card purchases.
Banking Fees
Banks typically bring in a significant amount of their money by charging customers fees to use their products and services. Banks may charge fees to create and maintain a bank account, as well as to execute a transaction. They may be recurring or one-time only charges.
All banks should be upfront about all of their fees and disclose them somewhere accessible to their customers. You can often find a bank’s fee schedule online or in the documents you received when you opened your account.
It can be a good idea to learn about the types of fees that your bank charges in order to avoid or minimize fees and also catch any errors. If fees seem unreasonably high, you might also decide to switch to a different bank or financial institution that charges less.
Some of the more common bank fees include:
Service fee: A monthly fee charged for keeping an account open.
Account maintenance fee: A monthly fee charged for managing an account.
Withdrawal limit fee: Charged when a customer exceeds the maximum number of monthly withdrawals allowed on a savings account.
ATM fee: Charged when withdrawing funds from an ATM terminal outside of your bank’s network.
Card replacement fee: Charged when a lost or stolen debit or credit card is reissued.
Overdraft fee: Applied when a customer’s bank balance falls below zero. Interest can also accrue on the overdrawn amount, as the bank may see this as a short-term loan.
Non-sufficient funds (NSF) fee: Charged when a customer makes a transaction but doesn’t have enough money in their account to cover it. The transaction “returns” or “bounces,” and the bank charges the customer an NSF fee.
International transaction fee: Charged when making a debit card purchase in a foreign currency or withdrawing foreign currency from an ATM.
Cashier’s check fee: A fee for purchasing an official check from your bank.
Stop payment fee: Applied when requesting that a bank stop payment on a pre-written check from your account.
Wire transfer fee: Charged for electronically transferring funds from one bank to another.
Paper statement fee: A fee for providing monthly bank statements in the mail rather than digital statements online.
💡 Quick Tip: Bank fees eat away at your hard-earned money. To protect your cash, open a checking account with no fees online — and earn up to 0.50% APY, too.
Credit Unions vs Banks
Are you wondering about the difference between a credit union vs. a bank? A credit union is a nonprofit, member-owned financial institution that, like a bank, makes loans and offers checking and savings accounts.
Members purchase shares in the credit union, and that money is pooled together to provide a credit union’s services. Individuals interested in banking with a credit union must fit specific eligibility requirements (sometimes regional, employment-related, or requiring direct relation to an existing member) and apply for membership.
Unlike a bank (which is a for-profit business), a credit union returns its profits to members, which means it may have lower fees and better interest rates on savings accounts and loans than traditional retail banks.
Because they are often smaller entities, however, credit unions tend to provide a limited range of services compared to banks. They may also have fewer locations and ATMs.
Recommended: Alternatives to Traditional Banking
The Takeaway
To make a profit and cover their operating expenses, banks typically charge for the services they provide.
When a bank lends you money, for example, it charges interest on the loan. When you open a deposit account, such as a checking or savings account, there are typically fees for that as well. Even fee-free checking and savings accounts often come with some fees.
It can be wise to take a second look at the fees outlined in your banking contract in order to get ahead of any surprise charges down the line. And to look for a fee-free bank if you are getting hit with fees.
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SoFi members with direct deposit activity can earn 4.00% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate. SoFi members with direct deposit are eligible for other SoFi Plus benefits.
As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.00% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.
SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.00% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.
SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.
Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.
Interest rates are variable and subject to change at any time. These rates are current as of 12/3/24. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.
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