Banks have been around for centuries.

Although in those times it may not be operating the same way we see it now, banks are mainly for keeping records of trades done by merchants. In the ancient Mesopotamia, banks existed to provide lending activities such as lending the farmers some seeds, or anything the farmers can work with.

And when the time comes that the farmers are able to harvest, they would pay back the bank from whatever they harvested.

The biggest development in the banking industry happened in the 17th to 19th century in London. In fact, the banking concepts that we see now were based around the banking system that started in London such as making deposits, issuing loans, etc.

Now you might wonder, how do banks make money to run their operations for centuries?

Banks are not designed for altruistic reasons. The services they provide are created to generate profit just like any other business. They need money to operate and continue to serve people.

Let’s dig deeper on the 4 ways on how banks make money off of you:

By issuing loans

You go to a bank to open an account where you plan to keep your cash as savings. Do you think your money just sits there, not moving at all? Banks use the deposits made to be able to issue loans to individuals or businesses. If you plan to apply for a loan in your bank, you’re basically borrowing your own money.

Charging interest on loans is one way for banks to make money. Banks earn money through the interest rates they charge on a loan. Be it a cash loan, mortgage or a car loan, there are interest rates attached to it.

If you are a customer with an excellent credit profile and good credit history, interest rates are lower. Also because being in a good financial stature presents you to have a lower risk of default.

Banks and other financial institutions want to attract you with lower interest rates because you are a desirable customer for them.

On the contrary, borrowers with less impressive financial backing are often charged with higher interest because the probability for them to default is high.

Service Fees

Credit card fees – The credit cards that you use are issued by banks. Banks typically offer credit cards to their customers to encourage them to be loyal customers of the bank.

The interest rates on your credit card bill is another way to earn money. In addition to that, monthly, annual fees, membership fees, and late payment charges are also a way for the bank to increase their income.

Processing payments – Banks make money in processing payments for businesses that are accepting credit cards from customers. The fees are charged monthly or per-transaction

Wealth Management – Some banking institutions have wealth management services being rendered by financial advisors. Commissions and fees are paid to boost the bank’s profits.

Other fees

Banks are charging various fees to their customers. The more a bank collects fees, it generates more income for the institution. Every move you make in a bank there is just an equivalent fee for that- withdrawal fees, transaction fees, application fees and many more. Some banks even charge a “teller fee” when you talk to a real person when you have an inquiry about your account. It sounds ridiculous, but it is actually happening in some banks.

But in reality, many banks are charging these costs to their customers so they will be discouraged to go personally to the bank and slowly transition their customers to online banking and for the banks to reduce the number of employees to serve the customers in the bank.

Here are other banking fees you might encounter:

ATM – If you are withdrawing your money from an ATM that is out of your bank’s network, expect a higher fee being charged on your account.

Overdraft – An overdraft fee is related to a service called overdraft protection, which saves you the embarrassment of issuing a bounced check or missed payments when you go overboard in spending what you have in your bank account.

Application fees – Banks and moneylending companies are charging application fees when applying for a loan.

Commissions – Other banks offer investment outside of their basic services and most likely it charges fees.

In summary, banks can make money in various ways – interest rates, interchange fees, and banking fees.

Recently banks are being criticized for their increasing interest rates and people think that the charges are getting out of hand. But when you understand how a bank works and where they charge more, you will be one step ahead in avoiding to give more of your money to the bank.

Always remember that being aware of the fees may help you to know which services of the banks work in your best interest.