When you first opened your bank account, it was probably with the same bank your parents used. Banking becomes part of our lifestyle. From depositing our paychecks to paying bills, it’s something we access all the time. Part of achieving your financial goals is having a savings account. As you contribute money to your bank account, what you may not know is that your bank is making money off of your money. In fact, for the full year of 2025, the financial institutions reported a net income of $295.6 billion, according to the FDIC Quarterly Banking Profile. This was a 10.2% increase from 2024.
Want to find out how banks are making money? Read on to learn how banks lend out money, invest it, and charge fees to earn a profit.
How The Banks Lend Money
The Federal Reserve doesn’t require U.S. banks to maintain a cash reserve. Although generally, banks still keep a small fraction of their customers’ deposits on hand. The remaining funds are lent out as consumer loans or business loans. The borrowers will pay the bank interest. This process is called financial intermediation. Let’s take a look at a simple scenario to see how this actually works.
For you, as a bank customer, you’re likely making very little earnings from your deposits. Let’s say you deposited $1,000 into your savings account. The bank offers you 1% annual percentage yield (APY). Thus, you’d earn $10 in interest from the bank after the first year.
In the meantime, your bank has lent $800 to another consumer who took out a loan. They charge the borrower 5% interest. The bank now earns $40 in interest from the borrower.
Since the bank paid you $10 in interest, but earned $40 in interest from the loan, it made a profit of $30. This spread is known as the net interest margin and is how banks make money in the background without you noticing.
Where Banks Invest Your Funds
The banks aren’t solely making money from lending it out to customers. They also invest it in several ways. One way they do this is by purchasing government securities in the form of treasury bonds, notes, and bills. Basically, it’s a safe way to earn low interest.
They might also invest in corporate bonds or other securities, but this carries higher risk and is subject to restrictions. Another way is through interbank lending. This process involves banks lending money to one another overnight to ensure they meet regulatory requirements.
The Bank Fees You Pay
When you open a bank account, you’re usually provided with a brochure that lists all of the bank’s fees. The bank needs to make money, so it typically has a long list of fees it can charge you. The most common types of charges include monthly bank fees, insufficient funds (NSF) fees, transaction fees, ATM fees, foreign exchange fees, wire transfer fees, and even inactivity fees. There are so many rules to follow, and if you’re not careful enough, you could easily rack up a bunch of these fees.
Earn Money From Your Savings
When you’re stashing money away into a savings account, you need to think about what purpose it serves. Is it for a short-term, mid-term, or long-term savings goal? Someone who is saving $7,000 for a family vacation this year looks completely different than someone who is saving for $75,000 for a home purchase that’s ten years away.
Usually, you want to keep your savings safe and not put them into risky investments. This is especially true if you need the money within a year or two. If you chase after “hot” investments, you might risk losing your hard-earned money as they tend to be volatile and highly speculative.
So, for those looking to earn more than a mere 0.35% interest rate, consider switching to a high-yield savings account, a certificate of deposit (CD) or a U.S. savings bond. These options could offer a higher interest rate than your current financial institution. Be sure to understand the terms and conditions, as some may require you to “lock up” your money for several years before you can access it. It’s also a good idea to shop around and compare before you decide to make the switch.
How To Reduce Your Bank Fees
Many customers at a traditional bank (like a brick-and-mortar bank) may be paying high fees for its services. These small monthly bank charges are easy to gloss over. But these fees can add up to hundreds of dollars over the course of a year. This could have a compounding effect if you’ve stayed loyal to the same bank for many years.
In my experience, I’ve moved my bank accounts from traditional banks to a FinTech company. The process took several weeks since I had multiple accounts. I had to ensure that I set up the new accounts, including automatic withdrawals and deposits, before closing the old accounts. It took a lot of work, but it was worth it. Ever since, I have been saving hundreds of dollars from bank charges every year and earning a higher interest rate on my deposits. So, it was a win-win situation for me.
If you’re tired of being charged with unnecessary fees, take the time to do your research. Find a financial institution that doesn’t charge you such high fees and penalties for using your own hard-earned money. Popular options include online banks and credit unions. What’s great about them is that they usually offer higher interest rates, no monthly fees, and no minimum balances when compared to traditional banks. The drawback is that, since they don’t have physical branches, cash deposits can be a bit more challenging. So, it’s important to weigh out the pros and cons and think about your banking needs.
FAQ
How do banks make money?
The process is quite simple. Essentially, they take deposits from customers, lend that money as loans, and charge a higher interest rate. So, for example, while your savings account might be earning you 2% interest annually, the bank could be lending out money and earning 6% interest. In simple terms, the 4% difference (6% minus 2%) is the margin the bank makes.
Do banks need to have a cash reserve?
Contrary to popular belief, the Federal Reserve announced on March 15, 2020, that cash reserve requirements were eliminated for U.S. banks. Even though this rule came into effect, banks still typically maintain cash reserves to manage risk and ensure customers can make withdrawals.
What happens if the bank doesn’t have enough money for its customers to make withdrawals?
Hypothetically, if a bank didn’t have sufficient funds to meet a high demand for withdrawals, it would face a liquidity crisis (also known as a “bank run”). Usually, this would happen when a large group of customers tried to withdraw cash at the same time because they’re afraid the bank is insolvent. It’s possible that the bank would temporarily hold withdrawals or freeze accounts to enforce some restrictions.
Is your money safe in a bank account?
Yes. If you have money in a U.S. bank account, you usually shouldn’t have to worry about the safety of your assets. That’s because the FDIC guarantees deposits up to $250,000 for each depositor, for each U.S. FDIC-insured bank, and for each account ownership category.
How do I earn more money from my savings?
If your bank is giving you next to nothing in interest on your deposits, you could explore options that provide you with higher interest rates. Online banks and credit unions typically offer higher interest rates compared to brick-and-mortar banks because they don’t have overhead costs.
The information provided on this website is for general informational and educational purposes only and should not be considered financial, investment, legal, or tax advice. While we strive to provide accurate and up-to-date information, we make no guarantees regarding the completeness, reliability, or accuracy of any content. Any financial decisions you make are your responsibility. You should consult with a qualified financial advisor, accountant, or other licensed professional before making decisions based on information found on this site.
Past performance is not indicative of future results. Any examples provided are for illustrative purposes only and may not reflect your individual circumstances. By using this website, you agree that we are not liable for any losses or damages arising from your reliance on the information provided.
Sources:
- https://www.bankrate.com/banking/what-banks-do-with-deposits/
- https://www.fdic.gov/quarterly-banking-profile#fourth-quarter-2025
- https://www.federalreserve.gov/monetarypolicy/reservereq.htm
- https://www.fool.com/money/banks/articles/the-quiet-way-banks-make-billions-from-checking-accounts/
- https://www.wealthfront.com/blog/how-traditional-banks-make-money-from-you/
- https://www.investopedia.com/terms/b/bankrun.asp
- https://www.fdic.gov/about/what-we-do
- https://www.reuters.com/markets/how-does-bank-deposit-insurance-work-who-does-it-cover-2023-03-21/
- https://gainbridge.com/post/gic-account
- https://www.forbes.com/advisor/banking/best-online-banks/
- https://www.bankrate.com/banking/savings/online-vs-brick-and-mortar-banks/
- https://www.investopedia.com/terms/c/commercialbank.asp
