Banks earn money by charging for services and by making money on the difference between what they pay depositors and what they charge borrowers

When you put money in a savings account, the bank pays you a small amount of interest — usually less than 1% per year. When someone borrows money from that same bank, they pay interest on the loan — often 5% to 10% or more, depending on the type of loan. The bank keeps the difference. That spread between what they pay you and what they charge borrowers is their largest source of income.

But interest on loans is only one piece. Banks also charge fees for services, and they invest money in stocks and bonds. Understanding how banks make money helps explain why they ask for certain information when you open an account, why some accounts pay more interest than others, and why banks sometimes seem to push certain products.

Key Takeaways

  • Banks earn most of their money from the difference between the interest they pay depositors and the interest they charge borrowers.
  • Monthly maintenance fees, overdraft fees, wire transfer fees, and ATM fees are a second major source of bank income.
  • Banks invest customer deposits in stocks, bonds, and other securities, and they keep the profits from those investments.
  • The interest rate you receive on savings depends partly on how much money you have and how long you agree to keep it there.
  • Banks are required to keep a portion of customer deposits on hand and cannot lend out every dollar that comes through the door.

Interest spread: the money banks make on loans

A spread is the gap between two numbers. In banking, it is the gap between what a bank pays you on deposits and what it charges borrowers. If your savings account earns 0.5% interest and a mortgage borrower pays 6% interest, the bank's spread is 5.5 percentage points.

The bank uses some of that spread to cover its own costs — paying employees, maintaining branches, running technology systems. The rest is profit. On a mortgage of $300,000 at 6%, the borrower pays roughly $18,000 in interest in the first year alone. The bank keeps most of that money after expenses.

The size of the spread changes based on what the Federal Reserve does. When the Fed raises interest rates, banks can charge borrowers more. But they also have to pay depositors more to keep their money in the bank. Banks try to raise deposit rates more slowly than they raise loan rates, which widens their spread and increases profit.

Fees for accounts and services

Banks charge fees for almost every service beyond basic deposit and withdrawal. A monthly maintenance fee (sometimes called a service charge) can range from $5 to $15 per month, though many banks waive it if you keep a minimum balance or set up direct deposit. An overdraft fee — charged when you spend more than you have in your account — typically costs $30 to $35 per incident. Some banks charge multiple overdraft fees in a single day if you make several purchases while overdrawn.

Other common fees include wire transfer fees ($15 to $30), ATM fees when you use another bank's machine ($2 to $3), and fees for stopping a check payment ($25 to $35). Some banks charge fees to close an account early, to replace a lost debit card, or to get a paper statement instead of electronic. These fees add up quickly, especially for people who overdraw frequently or use out-of-network ATMs.

Fees are a significant part of bank revenue. In 2023, overdraft fees alone generated billions of dollars for U.S. banks. This is why banks sometimes seem to encourage overdrafts — they profit when you spend money you do not have.

Investment income from your deposits

When you deposit money in a bank, you are not just giving the bank permission to lend it out. You are also giving them permission to invest it. Banks take customer deposits and buy stocks, bonds, real estate, and other investments. Any profit they make on those investments is theirs to keep.

A bank might take $100 million in deposits and invest $80 million of it (keeping $20 million on hand to cover withdrawals). If those investments earn 8% in a year, the bank makes $6.4 million. Meanwhile, it might pay depositors only 0.5% interest on their savings accounts — about $500,000. The bank pockets the difference: roughly $5.9 million.

This is why banks are careful about which investments they make. A bad investment can wipe out profits quickly. Banks are also required by law to hold certain types of investments and to avoid taking on too much risk. The goal is steady, predictable returns that exceed what they pay depositors.

Why banks ask for information and offer different rates

When you open an account, banks ask for your Social Security number, address, employment status, and sometimes your income. They use this information to assess risk. A customer with stable employment and a good credit history is less likely to overdraw or default on a loan, so the bank is willing to offer them better rates and lower fees.

Banks also offer different interest rates based on how much money you have and how long you agree to leave it there. A certificate of deposit (CD) pays higher interest than a savings account because you promise not to withdraw the money for a set period — 3 months, 1 year, 5 years. The bank can invest that money with confidence that it will not need to return it quickly. A savings account pays lower interest because you can withdraw anytime, which limits how the bank can invest the money.

Premium checking accounts and money market accounts often require higher minimum balances but pay better interest rates. The bank is willing to pay more because a larger deposit gives them more money to lend or invest.

Reserve requirements and how much banks can lend

Banks cannot lend out every dollar that comes through the door. The Federal Reserve requires banks to keep a portion of deposits on hand at all times — this is called a reserve requirement. The exact percentage varies, but it ensures banks have cash available if many customers want to withdraw money at once.

This reserve requirement limits how much profit a bank can make from lending. If a bank receives $1 million in deposits and must keep 10% in reserve, it can only lend out $900,000. The bank earns interest on that $900,000, but not on the $100,000 sitting in reserve. This is one reason banks push for more deposits — more deposits mean more money to lend, even after setting aside reserves.

How competition affects what banks pay and charge

Banks in the same area compete for customers. If one bank offers 4% interest on savings and another offers 0.5%, customers will move their money to the higher-paying bank. This forces banks to raise their rates to stay competitive. Online banks, which have lower overhead costs than brick-and-mortar branches, often pay higher interest rates because they can afford to.

Competition also affects fees. Banks that charge high overdraft fees may lose customers to banks with lower fees. Some banks have reduced or eliminated overdraft fees in recent years because of customer pressure and competition. However, banks in areas with less competition may charge higher fees because customers have fewer alternatives.

The interest rate environment also matters. When the Federal Reserve raises rates, all banks can charge more for loans and must pay more on deposits. When rates fall, banks can reduce what they pay depositors while keeping loan rates high — widening their spread and increasing profit.

Frequently Asked Questions

Why do banks pay almost no interest on savings accounts?

Banks pay low interest on savings because they can. Deposits are insured by the FDIC up to $250,000, so customers keep money in banks for safety, not returns. Banks also know most people will not move their money for a 1% difference in interest. Online banks pay higher rates because they compete on interest rather than branch locations.

Do banks make money when I use my debit card?

Yes, indirectly. When you swipe your debit card, the merchant's bank pays your bank a small fee (usually less than 1% of the purchase). The merchant absorbs this cost, which is why some stores charge more for credit card purchases. Banks also make money if you overdraw while using your debit card.

What happens to my money if the bank fails?

The FDIC insures deposits up to $250,000 per account holder per bank. If a bank fails, the FDIC pays depositors back. This insurance is funded by banks themselves, not by taxpayers. Your money is safe even if the bank goes under, as long as you stay within the $250,000 limit.

Can I negotiate fees with my bank?

Sometimes. If you have a good relationship with your bank, maintain a high balance, or have been a customer for years, you can ask a manager to waive fees. Banks are more willing to negotiate with customers who bring them money through deposits or loans. Online banks typically have fixed fees with no negotiation.

Why do some banks offer higher interest rates than others?

Online banks have lower costs because they do not maintain physical branches, so they can afford to pay more interest. Local banks may pay less because they have higher overhead. Banks also adjust rates based on how much they need deposits — if a bank needs more money to lend, it will raise rates to attract deposits.