how commercial banks make money
banks make money by imposing service charges on their customers these fees vary based on the products ranging from account fees monthly maintenance charges minimum balance fees overdraft fees and non sufficient funds nsf charges safe deposit box fees and late fees many loan products also contain fees in addition to interest charges banks also make money from the interest they earn when they lend money to their clients the funds they lend come from customer deposits however the interest rate paid by banks on the money they borrow is less than the rate charged on the money they lend for example a bank may offer savings account customers an annual interest rate of 0 25 while charging mortgage clients 4 75 in interest annually many banks pay their customers no interest or very little at all on checking account balances and offer interest rates for savings accounts that are well below u s treasury bond t bond rates commercial banks and lendingconsumer lending makes up the bulk of north american bank lending some of the most significant categories include residential mortgages automobile lending and credit cards mortgages make up by far the largest share mortgages are used to buy properties and the homes themselves are often the security that collateralizes the loan mortgages are typically written for 30 year repayment periods and interest rates may be fixed adjustable or variable although a variety of more exotic mortgage products were offered during the u s housing bubble of the 2000s many of the riskier products including pick a payment mortgages and negative amortization loans are much less common now automobile lending is another significant category of secured lending for many banks compared to mortgage lending auto loans are typically for shorter terms and higher rates banks face extensive competition in auto lending from other financial institutions like captive auto financing operations run by automobile manufacturers and dealers credit cards are another significant type of financing credit cards are in essence personal lines of credit that can be drawn down at any time private card issuers offer them through commercial banks visa and mastercard run the networks through which money is moved around between the shopper s bank and the merchant s bank after a transaction not all banks engage in credit card lending as the rates of default are traditionally much higher than in mortgage lending or other types of secured lending credit card lending delivers lucrative fees for banks for example interchange fees are charged to merchants for accepting the card and entering into the transaction banks also charge customers late payment fees currency exchange over limit and other fees as well as elevated rates on the balances that credit card users carry from one month to the next the total number of commercial banks in the united states in 2023 2importance of commercial bankscommercial banks are an important part of the economy they not only provide consumers with an essential service but also help create capital and liquidity in the market commercial banks ensure liquidity by taking the funds that their customers deposit in their accounts and lending them out to others commercial banks play a role in the creation of credit which leads to an increase in production employment and consumer spending thereby boosting the economy as such these banks are heavily regulated by a central bank in their country or region for instance central banks impose reserve requirements on commercial banks this means that banks are required to hold a certain percentage of their consumer deposits at the central bank as a cushion if the public rushes to withdraw funds commercial banks vs investment banksboth commercial and investment banks provide important services and play key roles in the economy for much of the 20th century these two branches of the banking industry were generally kept separate from one another in the united states thanks to the glass steagall act of 1933 which was passed during the great depression 3 it was largely repealed by the gramm leach bliley act of 1999 allowing for the creation of financial holding companies that could have both commercial and investment bank subsidiaries 4while commercial banks traditionally provide services to individuals and businesses investment banks focus on offering banking services to large companies and institutional investors they act as financial intermediaries providing their clients with underwriting services merger and acquisition m a strategies corporate reorganization services and other types of brokerage services for institutional and high net worth individuals hnwis while commercial banking clients include individual consumers and small businesses investment banking clients include governments hedge funds other financial institutions pension funds and large companies the gramm leach bliley act tore down the wall between commercial and investment banks but maintained some safeguards for instance it forbids a bank and a nonbank subsidiary of the same holding company from marketing the products or services of the other entity to prevent banks from promoting securities underwritten by other subsidiaries to their customers and placed size limitations on subsidiaries 4examples of commercial bankssome of the world s largest financial institutions are commercial banks or have commercial banking operations many of which can be found in the u s for instance as noted above banking has had to change with the rise of financial technology fintech some of the major commercial banks have an increased online presence some banks operate exclusively online for example ally bank ally is one of the major online commercial banks in the united states the bank is headquartered in detroit and has 196 billion in assets as of december 2023 7