Business Model of Banks - How do Banks Make Money?

When it comes to the banks, there is no doubt that they are here in order to make all the amazing financial services available to the people in the best way. The business model of banks is based upon generating revenues via interests, financial advice, and other transactional fees.

These banks are just like the companies which can be normally listed in the way in the place of the stock market. These banks are owned by the stakeholders.

The banks are channelized by ensuring that the money transfer and other financial options are provided to the employees, users and other entities in the best way for sure.

In this post, we will be covering the business model of Banks and understand how they proceed with their regular activities, how they make money and what are the different elements of a successful Bank Business Model.

Table of Contents

Introduction to the Business Model of Banks

When it comes to the ways in which the banks tend to make money, then first thing first, banks tend to charge an amount of interest on the capital that it lends out to different types of customers.

Apart from that, there are also some fees which are extracted from the services that they tend to provide by the people. Also, there is no doubt that there are some certain financial instruments which are provided in the financial markets, due to which they will also be able to charge the money as well.

There are some retail as well as the commercial banks which are here to provide certain services to the people. These allow people to make sure that they are able to deposit most of the money that they have.

These deposits that are made by the people are then used by the banks in order to stay in the business too.

Deciphering Business Model of Banks to understand how they Operate

It is important for people to know all that they can about the business model of the banks.

This is in order to make sure that they are able to know exactly how the banks tend to operate in the best way.

Now, when it comes to understanding the business model of the banks, there are certain things that the banks have to keep in mind for sure.

Well, when it comes to the banks, they tend to offer some amount of money to the people for their deposits. This is known as the interest that is provided to the people. The interest will be paid on behalf of the users that want to take the services of the banks for sure.

In addition, banks also take some interest from its lending activities.

Profits of the bank are decided from the difference between these two interests.

Well, there is no doubt that the money which is deposited on the bank is really one of the most important aspects of the bank’s business model.

Range of Activities conducted by Business Model of Banks

To channelize its operating and generate revenues, banks perform a wide variety of activities and they are:

Personal banking,
Corporate banking
Investment banking
Private banking
Transaction banking
Insurance
Consumer finance
Foreign exchange trading
Commodity trading
Trading inequities
Futures and options trading
Money market trading

Products comprised under the Bank Business Model

The business model of banks deals with two types of products- the first one is retail and the second one is business banking. They are further divided into different categories, let us have a look at those right away-

Retail Products of Banks

Savings account
Fixed deposit account
Cheque books
Individual retirement account (IRA)
Recurring deposit account
Certificate of deposit (CD)
Debit card
Money market account
Automated Teller Machine (ATM)
Credit card
Mortgage
Current accounts
Time deposits
ATM card
Mutual fund
Personal loan

Business/Commercial/Investment Products of Banks

Business loan
Revolving credit
Capital raising (equity / debt / hybrids)
Term loan
Risk management (foreign exchange (FX)), interest rates, commodities, derivatives
Credit services
Cash management services (lockbox, remote deposit capture, merchant processing)

Economic Functions Operated by Business Model of Banks

Wide variety of economic functions are channelized by the banks and some of those are-

Issuing of Money
Netting and Settlement of the Payments
Credit Intermediation
Credit Quality Improvement
Asset Liability Mismatch/Maturity Transformation
Money Creation/Destruction

Next thing that is quite important in understanding the business model of Banks is types of Banks, so let us delve into that as well-

Types of Banks under Business Model of Banks

Commercial Banks
Community Banks
Community development banks
Land Development Banks
Credit Unions or Co-operative Banks
Postal Saving Banks
Private Banks
Offshore Banks
Savings Banks
Building Societies and Landesbanks
Ethical Banks
Direct or Internet Only Bank
Investment Banks (Use for Capital Market activities)
Merchant Banks
Central Banks (Government Owned that comprise quasi-regulatory responsibilities for supervising Commercial Banks and Controlling Cash Interest Rate)

How Banks Make the Money- Revenue generated via Business Model of Banks

When it comes to the banks, generally people think how do they ever make that amount of money? Have you also ever wondered it in the first place?

Well, there are some banks which tend to provide some proper interest rates which are on the savings as well as the checking accounts to. There are some other banks which can earn money from the mortgages, financial products, and other auto loans as well.

Do you ever know how banks get to have interests in the savings accounts in the best way?

The banks are always in the businesses of selling the money and providing all the mortgages that are present.

There are auto loans, credit cards, small business loans which the banks tend to provide in order to make sure that they have all the amounts of interest that they need to take. Some other key ways of doing this are-

#1. By Taking Interests from the Borrowers

With the help of the interests, there is no doubt that the banks will be able to get all the money in the best way for sure. There is simply not a single doubt about the fact that there are so many amazing options that banks have these days.

There are so many different services which are provided in the banks these days. There is no doubt about the fact that there are so many amazing options for people in the best way.

When it comes to the interests on the payment, there is simply not a single speck of doubt about the fact that there are so many services provided on the banks these days.

With the help of the interests, the banks are able to provide all the amazing services to the people at t a certain rate of interest as well.

So, there is no doubt that having the interests for the services that are provided in the banks these days will be able to provide all of the important benefits to the people for sure.

With the help of the interests, the banks will be able to get all the money that they want. The interests are the rates that the banks will have in the best way.

#2. Fees That Are Charges By Banks for their Banking Services

In some banks, there are some important ways in which they are able to make all the amount of money that they want to have. In some cases, there are some banks in which people are able to make deposits and withdrawal in the best way.

However, when it comes to the deposits and withdrawals, there is no doubt that they will have to pay some charge for sure. So, this is one of the most important things that you need to know about when it comes to earning the money from the banks.

Whenever the customers have to make any form of transaction, they need to make sure that they are able to make some sort of deposits in the best way as well. In case you don’t want to make the deposit of the fee, there will be no transaction at all.

So, that is another important thing that you always have to keep in mind for sure. Now, there are some other options as well that you need to know about. For the providing of services, there is no doubt that you will have to pay the money to the banks in the banks.

There are some pretty common fees that the banks tend to take from the customers that they always have. For example, there are the account maintenance fees and other overdraft fees that they tend to take from the people.

There are also the late fees which are taken from people in case they are not able to pay the mortgage in the best way. Also, there are some fees for the bounced checks and some other important options as well.

With the collection of the fees, the banks are able to earn all the money that they need to have in order to pay the interests for the savings accounts of customers.

There is simply not a single speck of doubt about the fact that these fees will be collected by the banks in order to ensure that they are able to properly carry out all the functions that they have in the first place.

#3. Other Complimenting Services

There are some other complementary services which are provided by the banks these days. There are services such as investment options, and other important options that people can use.

We are talking about Certificates of Deposit, mutual funds, and so many other brokerage services as well. So, there is simply not a single speck of doubt about the fact that people will have to pay some sort of money to the banks in order to take care of these services.

There are so many other banks which would charge some higher investment options that you need to know about. This would be really important when it comes to investing in the best way. We would suggest that people go for the opening of the IRA with a proper brokerage firm.

Apart from that, there are also some other options such as the insurance products, chequebooks, notary services and some other options that you need to know about for sure. Not just that but there are some commissions that might be added in the bank services as well.

Along with that, there are also some referral programs which are included in the services of the banks in the best way.

Wrapping it up!

Well, there is no doubt about the fact that banks have many different ways by which the banks will be able to get the money that they want to have.

With the help of interests, fees, and some other complimentary services, the banks make sure that they channelize all the financial and economical service in an efficient and profit-oriented manner.

Banks have been the prime institutions behind the efficient channelization of economic activities across the world. The kinds of growth that we are witnessing all around us are actually the result of efficient business model of Banks in managing, channelizing and optimizing economic transactions.

How significant do you find the banking business model in strengthening the economic sustainability of a country? Share your thoughts with us in the comments.

Business Model of Banks – How do Banks Make Money?