Banks are commercial profitable institutions and need to increase their business, grow their revenue, and provide returns to their owners. Unlike other stores and shops, banks are providing services rather than selling their products. Learn how banks get their funds and how they make money on services. Read more to learn how the banks earn their profit!
Despite their central role in the economy at large and despite the various functions they perform that helps individuals at large, banks are still businesses. For their services, banks need to earn money to keep these institutions going. Banks earn money from various sources but most of their money comes from lending. When banks lend their money they earn loan interest which is paid to them by the borrowers of money.
People who put money into banks are called depositors. Banks encourage deposits by protecting the money and by paying the depositor interest, a percentage of revenue earned on the principal over a period of time. The depositor thus earns some money from the deposits.
Using the accumulated funds of many depositors, the bank makes loans to customers it considers likely to repay. When banks lend money, they put it to work. The money that people borrow goes to buy products or services, to manufacture goods, and to start businesses. In this way, the money that banks lend works to keep the economy going.
The bank charges more interest on the money it lends than it pays depositors, so when the money is repaid; more comes in than going out.
The difference between what a bank pays in interest and what it receives in interest is the spread or net interest income.
The spread is not pure profit. The spread is income or revenue, but costs have yet to be considered.
Costs include maintaining the security of your money, personnel expenses, building maintenance costs, and so forth.
Profit, or net income, is what's left of revenue after costs are deducted.
Banks have additional income sources. In addition to loan income, including credit-card interest, they also charge for various services. Charges include fees for rental of safe-deposit boxes, checking account maintenance, online bill payment, and ATM transactions. It is important to note that banks do not earn interest on money kept on hand for services such as ATM transactions. Thus, banks charge fees to offset lost interest. To keep pace with the rising cost of servicing accounts, fees for services have increased significandy. These service fees provide substantial revenues for banks.
Banks, like people and other corporations, make money on investments. They invest in stock markets and some types of securities and government bonds. While investing their money in instruments other than government bonds, they face the same risks as other investors. They hire professional investment staff to maximize their return on investments.
|Overview of Banking||What is Bank||Definition of Bank|
|History of Banking||Famous Banks||Gold Standard|
|Sectors in Banking||Segments in Banking||Different Types of Banks|
|Banking Transactions||Banking Operations||Banking Business Model|
|Banking Trends||Banking Value Chain||Banking Customers|
|Banking Functions||Bank Balance Sheet||Bank Revenue Model|
|Different Types of Payments||Modern Banking Products||Banking Regulations|
|Banking Projects||Banking Landscape||Risks in Banking|
|Types of Banks in India||Islamic Finance||Social Media in Banking|
|Digital Channels||Banking Challenges||Technology Risk|