Banks are like any other businesses. They are responsible for their shareholders. Therefore it is normal that they want to make money from their customers through a variety of routes as in any kind of business.
The following are some very common ways of how the banks make money:
1. Overdraft is one of the best ways to make money from their customers. While the banks pay their customers interest for depositing money with them, the same money is used to loan to customers who need overdraft. By using the overdraft facility offered by the bank, the user is required to pay the bank interest and service charges in return. The overdraft interest rate is usually higher than the saving or deposit interest pay out. The bank will make the difference in margin within the two interest rates.
2. Offering hire purchase loan to customer is another great source of income for the bank. Investing in property, equipment and motor vehicle requires upfront cash lay out. Customers who wish to invest in property, equipment or motor vehicle could do so by taking a hire purchase or leasing loan from the bank.
3. Investing in money market is a profitable and lucrative business. It is not for everyone. Bank is flooded with depositors’ cash. They have to find a way to find income to pay interest to their depositors. Investing in money market is a logical option for the bank to accomplish this.
4. Investing in stock and bond is also another great source of income for the bank.
The above list is not exhaustive. There are many more ways that a bank can make money from the abundant of cash that they have.
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