How Do Banks Make Money On Your Deposits-2023

how do banks make money on your deposits

Hello there, in this post I will examine, how do banks make money on your deposits.

If you are like most Americans you probably have a bank account. Every time you get paid by your employer or a customer, your pay-check or money transfer goes to the bank. Truth is, we all have a bank account, even those unfortunate enough to live on welfare.

Why People Keep their Money in a Bank

1-To earn interest. Even though banks do not pay top dollar on their high-interest savings accounts, getting something is better than getting nothing.

2-No Federal Insurance Protection. Federal insurance covers up to $100,000. there is no protection for that money inside your house.

3-Money is protected from theft and fire.

Banks have the responsibility to look after our accounts, deposits, withdrawals, money transfers, e-banking, and so on. All these services come at a cost. So, who is actually paying the banks to look after your money? You are!

How do Banks Make Money on Your Deposits

Banks cover these costs in three primary ways.

  1. Charging Fees
  2. Imposing Interchange
  3. Loan Interest

  What Are Bank Fees

Banks can and do charge their customers a large number of fees. Some of them are.

  • Late payment fee
  • Overdraft fee
  • Account maintenance fee
  • ATM fees
  • Commission fees
  • Returned deposit fee
  • Foreign transaction fee
  • Lost card fee
  • Minimum balance fee

In 2016 Bankrate estimated that consumers paid an average of $4,57 every time they withdrew money out of an ATM.

In 2016, the three largest banks in the country made over $6 billion out of ATM and overdraft fees alone.

What is an Interchange Fee

In addition, one of the biggest fees they collect and not many people know it is not paid by you. It is paid for by the store you shop at. Every time you go to the supermarket, the restaurant, or even the local deli and you pay with a card, the store is charged an interchange fee. Some of that fee is paid to the deli’s bank but, most of that fee is actually paid to your bank.

Interchange Fee Definition

Interchange fees are fees that the merchant’s bank account must pay every time a customer uses a credit or a debit card to make a purchase for their business

The stores have no other option (if they do not they will see a large drop in their income) than to accept. They must pay the interchange charge.

Loan Interest Policy

When your money is in the bank it doesn’t just sit there for you to use anytime you want.

Banks use your money, to make more money for themselves

They offer loans, car loans, home loans, education loans, investment loans, and so on, and they charge interest on these loans. Let us assume that a person needs money to buy a car. That person will apply to the bank for the loan. The bank will take the money from its customer’s deposits to purchase the car.

In exchange, that person will have to pay back the bank with interest. This process allows the bank to make thousands of dollars in profits.

If you consider that millions of people are taking bank loans all across the country then, the interest on all these loans adds up to billions of dollars. In reality, you are depositing your money in the bank and the bank loans it to other people.

How do banks make money on your deposits
Bank of America

The Bank of America Example

In 2016 Bank of America had $860 billion in deposits. They lend that money out and that year they made 44,8 billion in interest only.  The depositors for the benefit of using their money only got 1,9 billion in interest.

Nonetheless, just because the bank is loaning your money to other people, it doesn’t mean you do not have full access to it.

What is Reserve Requirement

Reserve requirement is the total amount of funds banks must have available every day. In the US banks should maintain at least 10% of their deposits available for their customers.

These funds are kept aside to deal with people’s everyday needs and rights, to withdraw their money. Banks aren’t an investment vehicle but they are a place for you to keep your money safe and have it easily available to pay bills and for emergency situations.

When interest rates are lower than inflation putting money in the bank is not wise. That is because the money bank will pay you back, in exchange for putting your money there, will not be enough to keep up with the rate at which money loses value. That means your money will be worth less in the future.

Furthermore, it will not be sensible to keep more than $100,000 in a bank account. That is because Federal Insurance protects up to $100,000. If your bank goes bust, as Lehman Brothers did, then anything over the $100,000 mark will be lost forever.

Final Words

Banks are making money using our deposits and at the same time by utilizing several other ways. We should be aware that all these hidden costs are been paid by us because, in the end, the bill comes to every single one of us.

Nevertheless, keeping money in a bank account nowadays is not advisable. The interest rates are way too low and inflation is sky high. I am afraid the money kept in a bank now, will have significantly less buying power in the next year.

At this moment there are still some alternative ways to invest and make sure you will not see the value of your money depreciate.

I hope the how do banks make money on your deposits post has been useful to you. If you still have any questions feel free to let me know in the content section.




-What Is The Meaning Of The Gold Standard

-What Is The Meaning Of The Gold Standard

-What Is The Meaning Of The Gold Standard

Many economists talk about the gold standard, but very few of us know what is the meaning of the gold standard.  The gold standard is a monetary system where the country’s paper money or currency, is directly linked to gold.  With the gold standard, the country agrees to exchange money into a fixed amount of gold.  That country sets a fixed price for gold, it buys and sells gold at that price.  The value of the currency is used to determine the price of gold.  The amount of gold the country possess must be equal to the amount of currency circulating.

England was the first to adopt the gold standard and that was back in 1717.  The United States followed and by 1880, most countries had adopted the gold standard.  The gold standard continued to be part of the world’s monetary system with a small break between the first world war, the great depression and the second world war.  It took President Nixon in August 1971 to abolish the rule of the gold standard.

The truth of the matter is people never trusted paper money or even coins.  From the ancient times, coins had to be made out of gold, you see gold was the value behind the coin.  The first gold coins go back to Asia Minor 3000 years ago.

Today the world operates on fiat currency which is a currency used because the government says so, or because fiat currency must be accepted as a means of payment.

Over the years there has been many voices calling for governments to go back  to gold standard.  Lately Alan Greenspan the former Federal Reserve Chairman. urges the US government to reform its monetary policy and go back to gold standard.  All I have to say is that I agree with him., as a major financial asset and also by investors in order to preserve their wealth.

Nowadays gold is still used by governments and banks, as a major financial asset. Banks also use it as an insurance for loans made to government.  Investors too use gold, to preserve their wealth.

-What Is Gold Bullion Bars

What is gold bullion bars and why investors put their money there?  A gold bar, is a quantity of a fine metallic gold, that is manufactured by a bar producer meeting the exact standard conditions, such as labeling and record keeping.-What Is Gold Bullion Bars

Bars are the most traditional way of investing in gold.  In many countries they can be bought directly through banks.  Bars are available in various sizes, 12kgr, 1kgr, 100gr, 50gr, 10gr, 1gr, etc.

The standard gold bar held as gold reserves and traded as such by the central banks, is the 400-troy-ounce. (12.400 or 438,9 ounces).  The 1000gr bar or the kilobar, is the most popular bar among investors, and it is used extensively for trading and investment. The premium of these bars when traded, is very low over the spot value of the gold, making it ideal for small transfers between banks and traders.

Nevertheless, bars purity must be 99.5%  (24 karats) at least, whereas there is a number of manufacturers producing bars at 99.9% purity.(24 karats too)