How do banks earn?

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Banks run on a profit-based business model. Similar to any other business, they have their sources of income and expenses. Their operations primarily involve borrowing and lending money. Lets decode how banks make money

How do banks earn?

There are various avenues through which banks earn money. These include the following : 

1. Net Interest Margin 

2. Interchange fee 

3. Account & ATM Charges

4. Others

Net Interest Margin

While banks borrow funds at a lower interest rate, they tend to charge comparatively higher interest rates on loans that they disburse. The difference in these interest rates is called net interest margin, which acts as a significant source of income for banks. The money that customers deposit in their savings a/c, current a/c, fixed deposits or recurring deposits is the money that banks borrow. On the other hand, banks earn by charging interest on financial products such as home loans, personal loans, car loans and others. The difference between these two interest rates is what banks focus on maximising.

Interchange Fees

Interchange fees are another major source of income for banks. It is the charge that financial institutions levy for carrying out transactions with debit cards or credit cards. Whenever a customer makes a purchase and swipes their cards, a specific charge is levied on the merchant. The majority of the interchange fees go towards the customer's bank. The rest goes towards the merchant's bank.

Account Charges

In addition to interchange fees, a bank levies a wide

range of charges such as the following:

1. ATM fees

2. Minimum balance fees

3. Late payment fees

4. Investment fees

Other Sources

Interest on investment: Sometimes financial institutions invest in different government and rated securities. They earn significant interest through these investments.

Forex operations:

Financial institutions are also involved in foreign exchange operations where they act as brokers. These operations also bring income to banks.

Commission earned on third party products: 

Banks also earn specific commissions through distributing mutual funds or insurance products to their consumers.

This content is inspired from the Instagram Post of Barely Opinionated