Three primary ways banks make money are:
- Interest Margin - Banks borrow money from depositors at a lower interest rate and lend it out to borrowers at a higher interest rate. The difference between the interest they pay on deposits and the interest they earn from loans is called the net interest margin, which is a major source of income for banks.
- Fees for Services - Banks charge fees for various customer services such as account maintenance fees, loan servicing fees, interchange fees on debit/credit card transactions, and fees for other financial products like insurance or mutual funds.
- Trading and Investment Income - Banks also earn money from trading securities they hold and providing investment banking services like underwriting, mergers & acquisitions advisory, and capital markets activities, generating fees and income from these services.
These three avenues—interest earning through lending, fee-based income from customer services, and income from securities and investment activities—form the core of how banks generate profits.
