Banks make money on the interest attached to the loans, certificates of deposit, credit cards and other products. In addition to revenues procured from interest rates on loans, banks also make money by charging fees for their services. Common fees charged by banks include ATM, overdraft and transfer fees.
Consumer and commercial lending is the biggest driver of bank profits. Mortgage loans, automobile financing, credit cards and personal loans are just a few of the lending activities banks take part in to make money. These practices provide revenue for banks because the associated interest rates yield a repayment that is higher than the initial loan amount. The difference between the money procured from interest rates and the money banks lend is referred to as a “spread” or net interest income.
The interest rate attached to a loan or financial product is set by the underlying bank based on the lender’s perceived ability to pay the loan back, the total market demand for said loans and the amount of money the bank has to lend out.
Aside from fees and interest, banks also make money by participating in large trades or deals within the marketplace. Investment banks, such as JP Morgan Chase and Goldman Sachs, earn significant sums of money by investing in the stock market and expediting large transactions such as mergers, acquisitions and Initial Public Offerings.