You have probably noticed that banks always have the nicest buildings out there. They have the nicest building because they make a lot of money. Let’s try to find out how they make that much money.
Today, we’re going to talk about banks. How do they really make money off of you? Banks are all different and unique in their own way. If we had to place them in certain categories, we could say they belong to three different types and they are as follows:
The ones that focus on consumers, and by consumers we mean. you and small businesses. We also have those that focus on institutions, they provide services to big companies and big investment firms. On the other hand we have the hybrids.
A hybrid bank does a little bit of both. One bank that could fit this criterion would be Capital One because they’re all about the customer, they’re all about having branches, having personal credit cards, having checking accounts, savings accounts, and others.
Then the bank that focuses their service at the institutional level would be a bank like Goldman Sachs. Then a hybrid of the two will be a brand like JP Morgan Chase.
On JP Morgan’s side, is where all their services are actually geared towards the institutional side. Then on the Chase side that’s where you see the branches all over the country with Chase.
How does the consumer-oriented bank make money off of you?
That’s very simple. This is the type of bank that we’re mostly familiar with. It’s no surprise that they make money off of you by charging you monthly fees because if you don’t have a certain amount of money in your bank account, they’re going to charge you a monthly fee to take care of the maintenance and stuff like that.
They also charge you for late fees or overdraft fees. They also charge you money every time you are trying to wire money. Any electronic transaction that requires wiring or sometimes even ACH, if you are a small business owner, because you just simply don’t want to carry that pile of cash with you to pay somebody else.
Another way they make money is by charging loan originations. If you ever had a personal loan from these banks, you would have paid at some point, a loan origination fee. The same thing applies for a car loan, they also charge your loan origination fees, and if you have a mortgage, they also charge you loan origination fees.
They charge you money for the checks, although most of the money for the checks goes to the printing company, but then some of them charge you a little bit more because it’s their paper. Lastly, they make money off of you by selling your mortgages.
How banks make money: Institutional investors
What is it that they do that they make a lot of money? What is it that they do that makes them different? This is where they generate a lot of money as well. They make money by being consultants. Any type of special investment analysis or investment services that they offer to big clients. That’s why they call it investment banking.
A good example is when they work as consultants or they guide big businesses to do mergers and acquisitions. A great example of that is, let’s say, the purchase of Sprint by T-Mobile.
They advise them on how much they should be paying for shares and then Sprint also needs to hire a bank to advise them on how much their share is actually worth so they can use that information and come to a middle ground and work on negotiations. Every time they do those consultings or like investment analysis or advisory fees, they get to charge a lot of money for it.
How they make money: Offering financial services
What type of financial services? Let’s say you have an IRA and every time you take that money out of your paycheck, you set it elsewhere in a brokerage house, you put it on the side, and that on the side it’s at a bank or a brokerage house, and then they take that money, and they invest it because it can’t grow if it’s just sitting in there.
They manage multiple portfolios, they manage big accounts from big corporations with lots and lots of money, where they can actually take that big chunk of money and start investing. That’s why you see your 401k growing. Even if you’re picking a random type of investment, somebody in the background is actually investing that money for you.
Another way these types of banks make money is through transactional services. You have probably heard the news that at some point there was a bailout, the Federal Reserve came in and they loaned money to these banks, they have to rescue them. They loaned the money and that means those banks, they have to pay that money back.
When they pay that money back, somebody needs to settle that money, somebody needs to allocate that towards a principal payment, and then reduce it and then allocate the interest and all of that, and the Fed in itself doesn’t do that. They need additional services, a third party, to handle those transactions for them and help them with the settlement. Every time they do that, they also charge money for it, because they’re not going to work for free.
Doing wealth management
What does that mean? People who have a lot of money and they don’t have time but still want to make money, or maybe they just simply don’t feel like it, and they want other people to manage their money for them. They take the rich people’s money, and they start doing research, they do analysis, and they suggest where you should invest your money.
Then another way is by doing research. Research takes a long time. Research takes going out looking for information, talking to people, and they don’t do just any kinds of research. They focus their research on anything that can make them money, and anything that can make their client money.
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