Banks are the leading organizations that hold the world’s assets and currencies in their hands. Banks do all sorts of tasks that are beneficial to your average citizen and a high society businessman. Their main priority is to keep a person’s assets safe. In today’s age, this is a major step towards security in a society where every person is keen to keep their assets safe from the prying eyes of others. One might wonder, “How do banks make money from time to time?”
It’s a fair question to wonder aloud, and we’ll be diving into it soon enough. The concept of banks started around 2000 BC. Merchants would give grain loans to farmers and traders who carried goods from city to city. This was the start of the concept of loans. Eventually, these merchants began to set up centers and guilds called banks. Later on, banks became specified around honing and securing finances as paper currency became worldwide in the 11th century.
Banks have been subjected to seamless innovations from then on, and the industry has expanded to an enormous size. If their main task is to secure assets, it makes you wonder how they profit from it all. When it’s their job to take care of others’ money, how do banks themselves make money? After all, nothing comes without a price.
What do banks do exactly?
Banks perform a wide variety of tasks to make the finance world run smoothly. Everything they do is so that the currency transfer from different pairs of hands goes without a hitch. It is the work of banks that keep deposits, credits, debts, loans, etc., kept track of. Some of the major tasks banks tackle are:
- Banks take care of your money.
- They lend money to those in need of assistance on loans.
- Banks lend debit or credit cards to help you pay for things.
- They help trade shares.
- Banks convert foreign currencies.
- They also store various deposits aside from money, such as gold and oil.
- Recently, banks have introduced the trend of cryptocurrencies and crypto wallets as well.
How do banks make money from these tasks?
Listing the tasks doesn’t exactly answer the key question, how do banks make money? Banks operate on large and small scales and profit from the variety of services they provide. Banks allow depositors and investors to input money into them and earn interest. As time moves forward, so do finance and technology.
Over time, banks refined their ways of making money. Aside from offering loan management and investment banking services to clients, banks also perform the following:
The customary method of making money for banks is interest income. The cycle works like a spindle-legged chain which includes depositors’ money, and the interest banks pay to them. Banks lend money depositors’ money to borrowers and, in turn, charge high interest on them. The higher the interest charged on loans, the more money the bank earns. This earning allows banks to benefit from the increased interest rates.
Like lending loans to individual borrowers, banks offer large-scale loans to large corporations and investors on the capital market. When corporations and their products debut on the market, banks often have a hand in funding these excursions. These capital market players usually have financial help while expanding their businesses.
The larger the funding, the more banks earn from these loans. It is a minimalistic way to keep the capital market cycle running while benefitting banks at the same time. Thanks to these types of loans, many new corporations have made themselves known far and wide.
Banks may work with corporations, insurance agents, investment services, etc., for referrals. Banks may get commissioned to refer clients to insurances or investment services which helps people find the services easily. These commissions are an added bonus to a bank’s income. If a bank has a large client base, they can earn more in commissions.
Banks hire advisors who can work with new business owners or students to work out their loan permits. These advisors can help businesses and individuals decide how much money they need in loans for these tasks. From then on, the borrowers can work out their interest rates and such with the help of advisors. Banks charge fees for financial advice with also adds to their income.
All industries and organizations offer services based on fees. Banks are no different. Just like a school would charge admission fees for the entry of a student, banks work similarly. Banks often charge fees on the opening of a bank account and monthly upkeep of the account. Each transaction made through an ATM is charged a small fee as well. Banks can also charge fees on debit and credit card dispatches. These are some fee-based ways banks profit.
The Spread of Fee-Free Banks
Recently, fee-free banks are making a comeback as customer-oriented banks prefer to keep charges cost-free. This encourages customers to use banking services more, which increases interest rates. In the long run, fee-free banks are more self-sufficient and make more money as more people use their services. Fee-free banks also encourage trust between the customers and the banks, which does more good than harm.
In a way, banks are just businesses that profit from their products. Like how restaurants use meals as a product they sell, banks use money as their product. As such, a bank’s product ‘money’ makes them money. The spindle-legged chain formed by banks keeps the circle of money going.