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.
Overdraft fees: You may be charged an overdraft fee of approximately $35 if you spend more than your account balance allows.
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.
Foreign transaction fees: Using your debit card or withdrawing cash abroad may incur a fee of 1% to 3% of the transaction amount.
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.