How Does A Bank Make Money?

How Does A Bank Make Money?
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Have you ever considered how banks make money? It seems like a simple question with a simple answer. After all, we put our money into their massive vaults and feed it through their systems. However, a lot of people never ask how banks turn a profit and how that affects us as “customers” whose money resides in their care. If you never stop to consider how banks make profits, you might never wonder if the traditional banking model is actually the best way to safeguard your money. At Factum Financial, our team just wants to see individuals, families and businesses using the best financial system to safeguard their wealth and establish their legacy.

Leveraging Your Money

One of the ways that banks make money is to leverage your deposits that they are in charge of watching over. When you put money in the bank, it doesn’t just go into the vault in the back and sit there until you’re ready to use it. Instead, the bank loans that money out and makes money back on the interest. However, because of financial restructuring in the last 20 years, banks don’t have to loan dollar for dollar. For every dollar that you deposit, the bank can loan ten, creating a major balloon. This is especially worrisome considering the current position of the FDIC, which insures banks to make sure that they have enough money to pay out to all their customers should everyone decide to withdraw their funds and the bank doesn’t have enough on hand. Reportes estimated that there is somewhere in the neighborhood of just $41 billion in reserve versus at least $6 trillion dollars insured. If the market were to crash like it did at the advent of the great depression, banks would have a hard time paying out the funds that they are supposed to have insured.

Assets Vs. Liability

Banks want to make money and as a business, they must make money to remain solvent. Therefore, they don’t want to just remain a storage place for your cash. When you make a deposit at the bank, despite that representing an asset for you, it’s actually a liability to the bank. If banks function the way they are supposed to, you should receive a tiny percentage of interest growth over the life of your money in the bank, which represents a loss for the bank. However, if you use the bank’s services or borrow money from the bank, that’s an asset to them. An auto loan or a mortgage are optimal for banks because as you repay the principal on your loan, you are also paying them a set interest rate on that money. If you ever wanted to know who has the better deal in a banking situation, consider the percentage at which your money grows versus what banks charge in interest for an auto loan with excellent credit. While banks are looking at making an average of 4.21% on a typical auto loan, your savings account has an APR yield between .01% and .06%.

Raking In Money On Fees

Paying fees for banking sucks, unless you happen to be the bank because the banks make tons of profit on the fees they charge. First there are the general fees that everyone has to pay, like the annual account fees. Application fees and ATM fees are assessed when you try to use any of the banks services or to access your own money. And if you ever have a late charge or something overdraws your account, you are hit with a huge fee as a penalty for life happening to you. Here is something to think about: banks collected over $30 billion dollars in overdraft fees last year. That’s a lot of money collected on accounts that are already empty.

A Different Way To Bank

If all of that is a little startling and sounds a little more shady than most people perceive banks to be, don’t worry because we see it the same way. At Factum Financial, we want to help people and businesses to escape the traditional banking system before it collapses in on itself. Our team can help you design a cash-flow system that truly offers compounding, returns dividends, allows your money to grow tax free and that can be used to make major purchases without a grueling approval process. Want to know more? Contact a wealth strategist on our team now for more information and to set up your no-cost wealth strategy session today.

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Zachary Gray is the Content Writer and Editor for HJR Global and associated companies. Zachary lives and works in the Phoenix Valley and writes on a variety of topics.