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How Banks Earn Money
Introduction
Every business exists with a main goal of making profit and banks just like any other business are driven daily by this goal. Generally banks have to make money to continue operating and to grow, they therefore engage in various income generating activities like advancing loans, accepting deposits, agency, financing foreign trade and remittance of funds. To achieve their main goal of making money, banks uses various strategy like levying interest on loans, charging their services, providing foreign exchange services, interbank leading and vaults charge.
To begin with levying interest on loans, banks accepts deposit from customers and uses them to issue loans at an interest rate. Commercial banks usually give customers a lower interest rate than what their deposit earned on loans issued thus earning money. Apart from using customer deposits banks use other funding like federal funds to issue loans at an interest rate. There are several kinds of deposits that act as source of bank finance which include Jumbo cash Deposit and whole sale deposits.
Bank also earns money from service charges on transactional accounts such as current and savings accounts. This charges include withdrawal fees, interest charged on money borrowed using customer credit card, merchant fee, overdraft charges, and bank statement charges among others. These charges are usually small and unfelt by many customers but they significantly contribute to banks' income as they are collected from large number of customers.
Through provision of foreign exchange services to customers for example; international bank to bank transfers, selling and buying foreign currency in cash form alongside providing foreign exchange dealings for multinationals, bank makes a lot of money. This is through services fees charged, commissions and exchange rate margins.