How Do Banks Make Money?

What Exactly Is A Bank? Banks are financial institutions that are legally allowed to receive money from depositors (customers like you and me) and use that money to issue loans to other customers.

Retail Banks

Retail banks are the most commonly known because these are the brick and mortar banks most individual customers use to deposit their money and take out loans for vehicles and home mortgages.


Commercial Banks

Commercial banks are similar to retail banks because they serve individuals and small businesses. These banks cater to small business loans and other smaller financial products available to individual investors.


Central Banks

Central banks cater to the needs of governmental agencies and help countries reach economic goals. These banks create and manipulate monetary policy to control the amount of currency available in the economy and governmental interest rates.


Credit Unions

Credit unions are owned by their members and not by a corporation. Because of the membership held status, credit unions are usually small local operations that provide a limited number of services.


How Do Banks Make Money?

Traditional banks use depositors money to make money off of other people in the form of financial products like: – Vehicle loans – Credit card payments – Short-term loans – Small business loans – Personal loans – Private student loans – Mortgages


Defining Net Interest Margin

The difference between the money banks make from interest and the interest they pay out to customers is known as the net interest margin.


Non-Traditional Investment Banks

Investment banks are quite different than traditional banks. Investment banks are primarily in the business of selling services to investment funds, companies, and governmental agencies. These banks typically don't deal with everyday investors.


How Banking Institutions Influence Our Economy

To keep our economy from completely collapsing, the government bailed out some of these banks. As previously described, the ability to loan money to consumers is an essential component of economic growth.


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