To the general public, it may seem like a bank is a bank is a bank. However, financial institutions can differ greatly in structure. And, the financial industry continues to evolve, becoming more complex to understand and navigate. To judge strategic success, we look to revenues, bottom lines, and equity prices.
There are a few key ways that banks and other financial institutions generate income and revenue. At its simplest, banks make money primarily in two ways — investment banking and commercial banking.
What is Investment Banking?
Investment banking refers to services that banks provide to corporations, governments, and other high net-worth individuals such as wealth management, corporate transactions, and corporate activities like mergers and acquisitions or initial public offerings (IPOs).
What is Commercial Banking?
Commercial banking focuses on products and services designed for individual consumers and businesses. Think checking and savings accounts, credit cards, mortgages, auto loans, and other types of personal loans.
How the Biggest U.S. Banks Make Money
Within the commercial banking world, hundreds of banks, including the biggest U.S. banks with the largest assets, rely on a mix of strategies to generate revenue. There are three key areas where banks generate revenue:
Fees
Any consumer with a bank account is familiar with bank fees. This can include anything from monthly account fees and out of network fees to overdraft and insufficient funds fees to origination fees for issuing new loans. For instance, the typical overdraft fee is $15 when a customer spends more than the amount available in their account. Overdrafts, and other fees, can be a significant source of bank revenue — the Financial Health Network reports banks and credit unions collected an estimated $9.9 billion in total overdraft/NSF fee revenue in 2022.
The Consumer Financial Protection Bureau (CFPB) is scrutinizing fees for financial services to help lessen the burden on consumers — and has proposed several rules to eliminate “junk fees” like overdraft charges, excessive credit card late fees, and more.
Credit and Lending
Beyond fees, banks also make money through credit and lending through the interest generated in the process. WIth credit cards, banks earn money through interest on credit card balances, as well as related fees like interchange and merchant fees — i.e., each time a retailer processes a credit card payment, a percentage of the transaction amount is paid by the merchant to the bank as an interchange fee. With lending, the bank funds mortgages, auto loans, small business loans, and personal loans based on customer deposits and earns interest on the loan.
Advisory Services
Many banks offer advisory services for an additional cost in different areas, such as wealth management, investments, or retirement. Some determine this cost based on a percentage of assets under management (AUM) while others charge a flat fee or hourly rate for services.
