Episode 8 of the #EverythingMoney Show covers the different ways in which banks make money.
It shouldn’t come as a surprise that banks make tremendous sums of money. But the main question is exactly how do they make their money?
How Banks Make Money
Banks happen to be some of the most profitable businesses that exist in our world today.
And their methods of revenue generation go much deeper than the fee income – maintenance fees, overdraft fees, etc. – that they collect from their account holders.
Being that they are literally a business centered around the use and manipulation of money, banks and credit unions have made an art out of generating revenue from various sources. Some of these ways aren’t accessible to people like you and me, but most of them are. And if you are willing to get certain licenses within your State, then you can leverage some of the most advanced methods of income generation, as well.
Bank Income Generation Methods
For your information, I’m going to outline the various ways that banks generate revenue. Some of these ways are inherent within their system, and can’t be avoided, unless you maintain a minimum balance with the bank, or unless you’ve established a deeper business relationship with them.
These are things like:
- Overdraft Fees – If you overdraw your account.
- Monthly Maintenance Fees – A fee attached to most checking accounts that don’t meet a minimum monthly transaction history, or a minimum account balance.
- Stop Payment Fees – Fees associated with stopping lost, stolen, or misprinted checks from being paid.
- ATM Fees – Fees from ATM withdrawals that are made at ATMs that aren’t within your bank’s network.
- Minimum Balance Charges – Fees that are charged when your account balance goes below the bank’s minimum balance requirement.
- Returned Deposit Charge – If you deposit a check that is returned due to insufficient funds.
- Hard Copy Statement Fee – If you refuse eStatements, physical statements now come with monthly fees.
- Foreign Transaction Fees – Transactions that you process on your debit card in foreign countries.
- Lost Card Fee – If you lose your debit card and order a replacement.
- Inactivity Fee – If your account has not had any deposits, withdrawals, or card charges.
- Account Closing Fee – When you choose to close your account and it is outside of the parameters that the bank has outlined for proper account closure.
There are also ways in which the bank uses customer money to generate more revenue. These methods include:
- Money that is deposited in a Certificate of Deposit and is locked in for a certain period of time. These funds are reinvested in fixed investments that pay higher returns like:
- Fixed Annuities.
- Credit Cards
- First Position Commercial Mortgage Notes.
- Banks also sell investment products to their clients, and keep a spread from the return of the investment.
- For example: When you purchase an Indexed Annuity from your bank, they take your money to a Life Insurance company and purchase an Indexed Annuity in your name. Then, if your annuity generates 5% return, the bank will pay the client 3% and keep 2% as a spread.
- This method is used with many of their investment and savings products.
Moral of the Story
Even though there are a wide variety of fees and charges that banks have, there are definitely ways that you can avoid them all together.
One way to avoid most maintenance, balance, overdraft, and stop payment fees – among others – is to have a strong relationship with your banker, and carry balances in your accounts that are far above the minimum requirements that your bank has.
However, to avoid paying the bank an unnecessary spread on your investments or asset management fees is to go directly to the insurance carrier or retirement company that offers those products to the banks.
There are rarely instances where a bank has their own proprietary retirement plan. If they do, it’s through the insurance company that actually owns that bank.
Most other times, the bank goes to a third party carrier or company that offers the product which they are selling. Therefore, your best interest would be to go directly to that asset management company or insurance carrier and have them open the account for you directly.
Our Licensed Financial Consultants can help you do this. We are appointed directly with over 30 of America’s top Insurance and Retirement carriers and we can get you direct access to their products.
We don’t charge a consulting fee, or an asset management fee to offer this service. And whatever rate of return you get is what you keep.