How Much Do Banks Make?
According to the Federal Deposit Insurance Corporation (FDIC), US commercial banks earned a record 237.3 billion in net profits in 2018. This was a 43% increase from 2017’s profit of 166.1 billion, and a staggering 63% increase from 2006’s pre-recession profit of 145 billion.
As detailed by our past blog article, banks do business by redistributing money. When customers deposit money into bank accounts, the bank pays them a small amount of money in return, which is called interest on savings. The bank then lends the deposited money to others, and earns money by charging the borrower a larger amount of money called interest on loans.
The difference between the interest on loans (money the bank receives) and the interest on savings (money the bank pays) is called the net interest margin, which accounts for roughly ⅔ of the banks’ total revenue. Since 2015, the Federal Reserve “The Fed” has increased short term interest rates, causing the interest rate on loans to increase. The banks have the power to help consumers by raising the interest rate on savings, but instead have decided to keep it low, typically around 0.01%. As a result, banks earn huge interest margins of 4–5%, and will only make more as short term interest rates increase.
Another key source of revenue is loan performance. When banks loan money to consumers and businesses, they assume that at least some borrowers won’t pay them back. To account for this, banks put a certain percentage of these loans aside as loans that won’t be paid back. This process is called “allowance for loan losses.” However, if these loans are paid back better than anticipated, the revenue goes directly into bank profits. As the economy has recovered from the recession, actual loan losses have steadily decreased, resulting in higher bank profits.
The banks’ last major source of revenue is their exorbitant variety of fees. Banks charge a many “non-interest related” fees, such as monthly maintenance fees, ATM usage fees, late payment fees, overdraft fees, and much more. To illustrate some of these costs, ATM fees have reached $4.68 on average, and overdraft fees can reach around $40. Although these fees may seem small, they add up. In 2017, the ten largest national banks collected 11.45 billion from overdraft fees alone.
In addition to these fees to consumers, there are also hidden fees on merchants, called interchange. Every single time a credit or debit card is used, the merchant is required to pay a small fraction of the cost to the card’s affiliated bank. This ranges from about 1.7% for credit cards and about 1.1% for debit cards. Considering that about 78% of Americans own a credit card and their habit to spend rather than save, banks make enormous profits daily. To counter this, merchants are forced to raise their prices to maintain profits, which hurts both consumers and local businesses who price out valuable customers. Additionally, some stores adopt cash-only policies to avoid these fees, which can restrict accessibility between consumer and product.
Today, many banks market their low fees and high interest rates on savings. However, at Beam, we don’t charge any fees at all. This easy opportunity to save is possible because maintaining our mobile banking app doesn’t require the large operating costs of physical branches. Additionally, we offer rates that pay up to 200 times more (2–4% APY) on your deposits than those of commercial banks. We are trusted by reputable institutions such as Forbes Inc., Stacking Benjamins, and more. Our mission is to refocus banking onto the consumer, rather than profit. Learn more at our website, and browse more articles here.
