Megan Lee is a writer and editor who specializes in travel, personal finance, education, and healthcare. She has been published in U.S. News & World Report, REI, USA Today, and elsewhere, and has spoken at conferences like NAFSA’s Annual Conference & Expo. Megan has built and directed remote content teams and editorial strategies for several websites, including NerdWallet, GoAbroad, and Ramp. When she's not crafting her next piece of content, Megan adventures around her Midwest home base, where she likes to drink cortados (it’s research for her coffee blog, she swears), attend theme parties, ride her bike, and cook Asian food.
Key takeaways
Banks earn most of their income from the interest they charge on loans and credit cards, profiting from the gap between what they pay depositors and what borrowers pay them.
Customer fees, like monthly maintenance, overdraft, ATM, and late payment fees, provide banks with additional revenue.
Interchange fees on card transactions generate income for banks and can help fund perks like rewards programs.
Understanding how banks make money can help you choose accounts and services that keep more cash in your pocket.
Ever wonder how banks make money? Banks are for-profit businesses that earn most of their revenue from interest on loans, various customer fees, and investment returns. In this guide, you'll learn exactly how commercial banks turn a profit – and how to reduce the fees you pay along the way.
What is a commercial bank?
A commercial bank is a for-profit financial institution. It accepts deposits from individuals and businesses, offers a range of banking services, including checking and savings accounts, and lends money to its customers.
The money you deposit in a commercial bank belongs to you, and you can withdraw it at any time. Banks keep a certain amount of cash, known as a reserve, on hand for withdrawals – though there's currently no federal requirement that they keep a certain percentage in reserves.
Your money is safe in the bank thanks to the Federal Deposit Insurance Corporation (FDIC), which protects your money in the event of a bank failure. FDIC insurance covers at least $250,000 per depositor, per ownership category, at each insured bank.
Of course, these institutions don't provide these services for free. So, how do commercial banks make money? Let's take a closer look.
How do banks make money?
Banks make money primarily by charging borrowers more interest on loans than they pay depositors on savings accounts. They also earn revenue from customer fees, including overdraft and maintenance charges, card transaction interchange fees, and investment returns. Here's how each revenue stream works.
Interest income from loans and credit cards
When you open a savings or checking account, your bank uses those deposits to make loans to other people and businesses. These loans include mortgages, auto loans, personal loans, and lines of credit.
In exchange for using your funds, the bank pays you interest on your deposit accounts. They also charge borrowers interest rates on loans and credit cards that are higher than what they pay depositors.
The net interest margin (NIM) is the difference between the interest a bank pays on deposits and the interest it earns from loans and credit products. For example, a bank might pay you 0.5% on your savings account while charging borrowers 7% on a personal loan.
That spread is how banks generate most of their revenue. Interest income is typically a bank's largest source of income.
Banking fees
Another significant chunk of a bank's income comes from various bank fees. Some of the most common fees include:
Monthly maintenance fees: Banks often charge account maintenance fees to customers with deposit accounts. Depending on your bank, these fees can be waived if you meet certain requirements, such as maintaining a minimum balance.
Non-sufficient funds (NSF) fees: If your bank doesn't allow overdrafting and your transaction declines, you may have to pay an NSF fee. In 2023, customers paid more than $5.8 billion in overdraft and NSF fees combined.
ATM fees: Withdrawing money from an out-of-network ATM may cost you an average of $4.86 per transaction, which can add up quickly.
Excess transaction fees: Banks may limit monthly transactions and withdrawals. Exceeding the limit can result in a fee.
Credit card fees: Credit cards may have annual fees, late fees, or higher interest rates if you carry a balance. Paying your balance in full each month is the best way to avoid these charges.
Brick-and-mortar bank fees: Banks with physical locations may charge teller fees, statement fees, safety deposit box fees, and other service fees.
This may seem like a lot of fees, but not all banks are fee-driven.
Interchange fees
When you use your credit or debit card to make a purchase, the merchant pays an interchange fee – also known as a card processing fee – to the card issuer (your bank) for handling the electronic payment. These fees are typically a small percentage of each transaction, but they add up across millions of purchases.
Interchange fees also help your bank or card issuer afford to offer credit card rewards, such as cash back or points programs.
Investments and other income
In addition to earning interest on loans, banks invest their own funds in various assets to generate additional returns. Common bank investments include:
Treasury and government agency securities
Commercial and industrial loans
Loans to other commercial banks
If you're curious about your bank's investments, you can review its balance sheet.
Banks can also generate revenue by providing advisory services to businesses, including financial planning, investment advice, and wealth management. Some banks earn additional commissions through partnerships with brokerages and investment firms.
How to reduce your banking costs
Understanding how banks earn revenue can help you make smarter choices about where you keep your money. Here are practical ways to keep more of your paycheck.
Choose accounts with fewer fees
Look for checking and savings accounts that don't charge monthly maintenance fees or require minimum balances. Online banks and financial technology companies often offer fee-free accounts because they have lower overhead costs than traditional brick-and-mortar banks.
Avoid overdraft and NSF fees
Set up low-balance alerts, link a savings account for overdraft protection, or choose a bank that offers fee-free overdraft coverage on eligible accounts. These small steps can save you hundreds of dollars per year.
Use in-network ATMs
ATM fees can add up quickly if you regularly withdraw cash from out-of-network machines. Look for a financial institution with a large ATM network or one that reimburses ATM fees.
Consider alternatives to traditional banks
Credit unions and online financial institutions may offer higher savings interest rates, lower loan rates, and fewer fees than many traditional banks. For example, Chime® offers checking accounts with no monthly fees and access to over 47,000 fee-free ATMs1. SpotMe® provides eligible members with fee-free overdraft coverage on debit and Chime card purchases and cash withdrawals.2
Know where your money is going
Banks make money through interest on loans, customer fees, interchange fees, and investment returns. Use the strategies above to minimize unnecessary costs and keep more of your money.
Frequently asked questions
How do banks make a profit?
Banks profit mainly through the net interest margin – the difference between the interest they pay depositors and the interest they earn on loans and credit cards. They also earn revenue from customer fees, interchange fees, and investment returns.
What are three ways banks make money?
Common bank fees include monthly maintenance fees, overdraft fees, NSF fees, ATM fees, foreign transaction fees, credit card fees, and brick-and-mortar service fees.
What are the main types of fees banks charge?
Common bank fees include monthly maintenance fees, overdraft fees, NSF fees, ATM fees, foreign transaction fees, credit card fees, and brick-and-mortar service fees.
Can a bank use all of my deposited money for loans?
No. Banks maintain cash reserves to meet withdrawal requests, and your deposits are protected by FDIC insurance up to $250,000 per depositor, per ownership category, at each insured bank.
How can you avoid paying bank fees?
You can reduce bank fees by choosing accounts with no monthly fees, setting up low-balance alerts, using in-network ATMs, and comparing offerings from online banks, credit unions, and financial technology companies.
Chime® is a financial technology company, not a bank. Banking services provided by The Bancorp Bank, N.A. or Stride Bank, N.A., Members FDIC.
Chime is not FDIC-insured. The Bancorp Bank, N.A. and Stride Bank, N.A. are the FDIC-insured members. Deposit insurance covers the failure of an insured bank. Certain conditions must be satisfied for pass-through deposit insurance coverage to apply. FDIC deposit insurance limit is $250,000 per depositor, per insured bank, per ownership category.
Chime Checkbook: While Chime doesn’t issue personal checkbooks to write checks, Chime Checkbook gives you the freedom to send checks to anyone, anytime, from anywhere. See your issuing bank’s Deposit Account Agreement for full Chime Checkbook details.
By clicking on some of the links above, you will leave the Chime website and be directed to a third-party website. The privacy practices of those third parties may differ from those of Chime. We recommend you review the privacy statements of those third party websites, as Chime is not responsible for those third parties' privacy or security practices.
Opinions, advice, services, or other information or content expressed or contributed here by customers, users, or others, are those of the respective author(s) or contributor(s) and do not necessarily state or reflect those of The Bancorp Bank, N.A. and Stride Bank, N.A. (“Banks”). Banks are not responsible for the accuracy of any content provided by author(s) or contributor(s).
APPLE and the Apple Logo are registered trademarks of Apple Inc. GOOGLE PLAY and the Google Play Logo are registered trademarks of Google LLC. Third-party trademarks referenced for informational purposes only; no endorsements implied.
This guide is for informational purposes only. Chime does not provide financial, legal, or tax advice. You should check with your legal, financial, or tax advisor for advice specific to your situation.
Third-party trademarks referenced for informational purposes only; no endorsements implied.
Out-of-network ATM withdrawal and over the counter advance fees may apply except at FCTI® ATMs in a 7-Eleven® or Speedway, or any Allpoint® or Visa® Plus Alliance ATM participating in the Allpoint network.
Once the retailer accepts your cash, the funds will be transferred to your Chime account. You may use your barcode, debit card, or Chime Card to deposit cash. Cash deposit fees may apply if using a retailer other than Walgreens and Duane Reade. Cash deposits using a barcode or debit card are deposited to your Checking Account. If you have the Chime Card, those funds will be automatically swept to your Chime Card Secured Deposit Account. Cash deposits using your Chime Card first go to your Chime Card Account, then transferred to your Chime Card Secured Deposit Account. Cash deposits are not payment for any Chime Card balance due.
Licenses Chime Capital, LLC, Nationwide Multistate Licensing System ("NMLS") ID 2316451 Chime Payments, Inc., Nationwide Multistate Licensing System (“NMLS”) ID 2538752
Address: 101 California Street, Floor 5, San Francisco, CA 94111, United States.
No customer support available at HQ. Customer support details available on the website.
