How Banks Actually Make Money

Full transcript

Have you ever wondered how banks stay so profitable? It turns out their business model is surprisingly simple once you break it down. When you deposit your money into a bank, the bank doesn't just lock it away in a vault and wait for you to come back. Banks take most of your deposited money and lend it out to other customers — people buying homes, cars, or starting businesses. The bank charges those borrowers a higher interest rate than it pays you on your savings, and that gap in between is called the interest rate spread. For example, a bank might pay you two percent interest on your savings account while charging a borrower six percent on their loan — pocketing the four percent difference. Banks also earn money through fees — think monthly account fees, ATM charges, overdraft penalties, and credit card transaction fees that quietly add up over time. So banks profit by being the middleman between savers and borrowers, turning the money you trust them with into a powerful, constantly working revenue machine.