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How Big Banks Make Money and Why It’s Costing You

By Chime Team
February 28, 2017

The nature of numbers is strange. Make them too big (e.g. Americans paid $33 billion in overdraft fees last year) and they’re hard to wrap your head around. Say “nickel & dime”, on the other hand, and the phrase is quaint but lacks impact. Nickels and dimes are the loose change that rattles annoyingly in the bottom of a purse or pocket.

The truth is, the nickel and diming of Americans in the form of bank fees has hit epidemic proportions. It’s hurting people at a surprisingly wide range of income levels, yet it often goes unnoticed.

On average, American households are now paying close to $300 in fees annually. Given many people have less than $500 in savings (6 in 10 Americans), the bank fee epidemic is especially painful and detrimental to consumers’ financial well-being.

The question is, why do banks need to charge so much in fees? Part of it has to do with the overhead cost of bank branches. Today, most people opt for the ease and simplicity of mobile and online banking services rather than walking down the street to a local bank branch. However, even if you rarely set foot in a local branch (like most millennials), you and millions of Americans are still paying for them in the form of bank fees.

But overhead is just one part of the story. Over the last few decades, consumer banking has dramatically evolved to become less consumer friendly. Back in the day, many banks were small local businesses that primarily made money from interest on loans. Thanks to deregulation, today those small local banks have mostly gone by the wayside or merged into what has become a small set of “big banking” mega-corporations that offer an incredibly diverse set of financial products services.

As banks have evolved and grown, the culture of banking has changed from that of a friendly neighborhood small business serving its local community to a faceless corporation that’s far removed from the customers they serve. In this evolution, banks found new ways to charge fees by offering services like overdraft “protection” that in reality mean profiting from people’s confusion, misfortune, and mistakes. As Lisa Servon describes in her book The Unbanking of America, “banking became about tricking people and figuring out how to manipulate and deceive them.”

Big banks’ fees on the rise

Last year banks made 33 billion dollars in overdraft fees alone. Most big banks charge a whole host of fees to cash in on their customers including maintenance fees, transfer fees, international transaction fees, service fees, and minimum balance fees to name a few.

When we choose a bank, we put a significant amount of trust into an institution. We expect them to look out for our money and best interests should anything go wrong. Unfortunately, this is not the case with many financial institutions, who’ve literally made billions by profiting from their customer’s misfortune, confusion, or mistakes. Most banks actually profit off of people’s mistakes by charging for situations such as an accidental overdraft on an account. To make matters worse, most people who got hit with an overdraft fee didn’t even know they were enrolled in so-called overdraft “protection” and would have preferred to have their transaction declined.

Bank fees are so common that many Americans are conditioned to them as the norm or they live in blissful ignorance about how much they’re actually paying.

A recent report found that most Americans are simply unaware of how much bank fees cost them each year. While less than half of respondents said they believe they are aware of every fee their bank charges, 78% of said they haven’t read their bank account terms and conditions. It’s easy to understand why this is the case given most terms and conditions are written in confusing legal language.That leaves consumers in the dark about potential fees on the account and how much they may cost.

Bank fees to keep an eye on

The two most common fees that people get hit with are an overdraft and insufficient fund fees. In a study of two million checking accounts where people had opted into overdraft protection, the average monthly fees paid was $21.61. That certainly stings considering 52% of people don’t remember opting into overdraft protection and it’s associated fees.

Let’s focus on overdraft fees for a moment, because they’re especially brutal. Most large U.S. banks charge between $35 and $38 per overdraft. A study by Pew Charitable Trust determined that frequent over-drafters have forfeited the equivalent to an entire paycheck due to overdraft fees.

To twist the knife, many big banks have specific ways of processing transactions that can count further against you. They process orders from the largest dollar amount to smallest, rather than in the chronological order they happened in. For example, say you spent $30 on lunch and $80 on dinner in one day, but only had $75 in your account. If your bank processes in chronological order, you’ll only be hit with one overdraft fee. If your bank processes from the largest dollar amount to smallest dollar amount, you’ll be hit with two overdraft fees. It’s a sneaky way to make more money off each customer through overdraft fees.

Big banks use fees to maximize the profit they make off individuals. You can see that by how they slap fees onto many of their services. Some of the most common fees you’ll encounter are:

  • Early account closure fees – closing an account before a set period of time
  • Foreign transaction fees – fees for spending money outside of your country
  • ATM fees – fees for using an ATM not associated with your bank
  • Overdraft fees – fees for overdrafting on your account
  • Maintenance fees – monthly fee for maintaining an account
  • Minimum balance fees – fees for not maintaining a minimum amount in your accounts (both checking and savings accounts may have this fee)
  • Service fees – fees for meeting with a teller instead of using free online services
  • Transfer fees  – fees both for sending outgoing wires and for receiving incoming ones

How to avoid bank fees

If you’re looking to avoid paying fees to your bank (and you should be), there are some easy ways to keep more money in your pocket and out of theirs.

Find out how much you have already paid in fees

One of the best places to start is to review your account history to understand just how much your bank has charged you already. Check out Bank Fee Finder, a free reporting service that empowers U.S. consumers to uncover how much they’re paying in hidden bank fees with their current bank. It lets you connect to your bank account and generate a personalized report that identifies fees paid broken down by ATM, overdraft, and monthly fees. The tool supports 17,000 banks in the U.S. and the site is protected by 128-bit encryption and read-only data to ensure the privacy and security of your data. You might be surprised to find out how much you’re paying.

Carefully review your terms and conditions

Once you understand how much you’ve paid in fees, make sure you also understand your bank account’s terms and conditions. It won’t be the most fun you ever have, but carefully reading through the nitty-gritty of your bank agreement can save you a lot of money in the long run. Banks bet on the fact that you’re not going read through the agreements. Fee schedules and terms may be buried in fine print or confusingly worded. When in doubt, contact your bank and ask them to explain all of the potential fees associated with your account.

Negotiate with your bank

You may be able to negotiate or opt in or out of fees. The only way you’ll know this is by doing your homework. Big banks aren’t going to tell you how to save money on their fees, so it’s best to come armed with all of the information so that you can make your case. Keep your goal in mind (get your fee erased) and do not make it easy for banks to say no. If you’ve been a loyal customer, be sure to point that out and remind the bank’s representative that your business can be taken elsewhere.

Consider the switch

The good news is that you do not have to pay bank fees! There are many banking options available today such as some credit unions and online banks like Chime that do not charge you unnecessary fees. Big banks rely on the fact that people would rather just pay their fees than go through the trouble of switching to a free bank account. The truth of it is, switching banks isn’t that hard to do and starts with closing your bank account and opting for a better one. It really only takes about six steps and it’s a lot less painful than forking over hundreds in fees each year unnecessarily


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. Your state or local unemployment agency is responsible for making all determinations on your eligibility for unemployment benefits. Please contact your state or local unemployment agency if you have questions.

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