Commercial banks are those that provide the general public with deposit and withdrawal accounts services, and with loans. The odds are you deal with a commercial bank on a regular basis. There are a variety of methods by which commercial banks make a profit, including fees, credit card interest, loans and optional add-ons. Firstly, commercial banks make a profit by fees. There are fees attached to most of the products that a commercial bank provides, and these fees add up to a large part of the average annual profit.
Fees are charged for checking accounts, debt card use, and credit card swipes. There are penalty fees for overdrafts and for late payments on bank-issued credit cards, and there are maintenance fees for many types of savings and investment accounts. Multiply each fee by the number of patrons at each bank and you will quickly understand how much is made in this way. Prepaid credit cards are a particularly profitable venture for many commercial banks. They stand to earn threefold through monthly fees, use fees and payment fees. Secondly, commercial banks make a profit by loans.
Commercial banks lend money to consumers in the form of car loans, mortgages and personal loans. The money distributed for these loans comes from the deposits of other bank customers, whose withdrawals may be restricted by a minimum balance, or by the term of their certificate of deposit accounts, for instance. Since the bank knows these funds will most likely remain where they are for a given period, a certain amount of the funds can be lent to others, who will then repay their loans with interest. The bank collects interest on the money of its depositors while never risking any actual money of its own.
In this way, the finances of several bank customers are managed using the funds of perhaps one depositor. Thirstly, commercial banks make a profit by credit cards. The interest rate on most credit cards far outweighs that charged for any other type of loan. Revolving credit places the buying power you need into your hands instantly at the time you need it, and customers are charged a premium for this privilege. In many cases, banks welcome new card holders with relatively low or zero interest rates on purchases or balance transfers.
The catch is that after the introductory period these rates jump up to the norm, which can range anywhere from 15 percent to near 30 percent. The profit windfall for the bank can be substantial, and can be sustained over a period of years while the customer attempts to pay down the debt. Last but not least, commercial banks make a profit by add-ons. Commercial banks typically offer a line of special features that are marketed as insurance against the accumulation of penalties such as overdraft fees — which are also applied by the bank.
Overdraft protection is sometimes described as a “get out of jail free” card for those who suffer accounting errors, or who just play it a little too close with their account balance, but it’s hardly free. In the end, the protection will likely cost you more than an occasional overdraft would. Add-ons are a clear way that commercial banks create revenue out of nothing. In conclusion, commercial banks make a profit by 4 main methods: fees, credit card interest, loans and optional add-ons.