Learn / Part 3 · Inside the Financial System
How Banks Actually Make Money
How do banks actually make money?
In brief
Banks borrow cheaply (from depositors and markets) and lend at higher rates, keep the difference, and earn fees on top. Understanding the business model explains why products are designed as they are.
Key ideas
The spread
The gap between the rate banks pay for money and the rate they charge for it is the core of the business.
Make an insight card →Fees fill the gaps
Account, card and service fees add to income and are priced where customers pay least attention.
Make an insight card →Your deposit is their raw material
Your savings fund their lending; shop for the rate you are paid.
Make an insight card →Try it
Rate translator
The same “rate” can be quoted monthly, quarterly or yearly, and it does not cost the same. Convert any quoted rate to its effective annual cost.
Open the full page: formula, variables, worked example and cautions →
Red flag
A “free” account whose costs appear only in the small print.
Ask before you sign
- How does this product make money for you?
- What do I pay that is not in the headline rate?
Do this week
Compare your savings rate with at least two other providers.
Try it · 10–45 minutes
List every fee your bank charged you last year.
Pause and reflect
Private to this device. Nothing is sent anywhere.
Words worth knowing
- Interest
- The price of using money: what a borrower pays and a saver earns.
- Fee
- A charge for a service. In finance, fees are often small in percentage terms but large over time.
- Incentive
- What motivates someone to act, including how a seller, adviser or lender gets paid.
Companion notes written for this website, based on the topics of Chapter 9. They explain ideas and do not reproduce the book. General information, not personal advice.