how banks make money

When the coronavirus pandemic hit last year, corporate executives rushed to raise money. Banks have been holding that cash ever since. At their core, banks make money in two main ways -- commercial banking and investment banking. Here's what each of these terms means and the. Origination. Banks charge origination fees on first-mortgage products, including fixed-rate loans. · Underwriting. Another source of profit for a lender is the.

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How in the World Does Venmo Make Money?


It doesn’t directly bring in much revenue now. But thanks to its silly-seeming social feed, that might soon change.

By Joe Pinsker

Every year, billions of dollars change hands in needlessly clumsy ways. Parents realize they’re short on cash and go out of their way to stop at an ATM so they can pay their babysitter; grandparents mail checks as birthday gifts, which take days to arrive and days to clear. Even as more and more of life is lived through a screen, paper is still how the vast majority of Americans give each other money.

In the past few years, a handful of tech companies have recognized these inefficiencies, introducing apps—such as Circle Pay, Square Cash, and Venmo—that let users transfer money to one another’s bank accounts using their phones, relatively frictionlessly. Among other things, they let users enter their bank-account information and then transfer money to others who have done the same. With Venmo, one of the more popular of these services, there is an additional wrinkle: Once money is transferred, the exchange shows up in the app’s social feed, a running record of who went out for drinks with whom, or whose roommate pays the electricity bill each month. (Users can elect to make a transfer private, but most don’t.) The app has among many—mostly young, city-dwelling people—attained a level of linguistic uptake reserved for the likes of Google and Uber: “Just Venmo me,” they say, after picking up a dinner bill.

The feature that sets Venmo apart is the social feed, which brings transparency to a class of transactions that used to be entirely private. The feed—an emoji-laden stream of often-indecipherable payment descriptions and inside jokes—seems frivolous; it is not a social-media destination in the way that Facebook or Twitter is. But as a public record, it is quite revealing of social dynamics—who’s hanging out with whom, and perhaps where. A friend of mine told me that Venmo proved invaluable in trying to determine if her ex and his new girlfriend were still dating.

In other words, pointless and goofy as it seems, people do pay attention to how banks make money they see in Venmo’s feed. And there’s actually a way this parade of public transactions might give the app a significant advantage over its many competitors.

The reason, says Richard Crone, who runs a payments-focused firm called Crone Consulting, has to do with how Venmo makes money—or, more precisely, how it will make money. Currently, Venmo doesn’t directly generate all that much revenue for the company that owns it, PayPal. (Contrary to what some of its users may have guessed, the app doesn’t make money “on the float”—that is, by investing whatever funds users keep as a positive balance in their Venmo accounts.)

Things could look different not too long from now. Venmo’s plan, which it has already initiated and will expand in the coming year, is to facilitate more transactions between businesses and their customers. Last summer, Venmo introduced partnerships with about a dozen apps (including the food-delivery service Munchery and the fast-food chain White Castle) that now let users pay straight from their Venmo accounts. The idea, Crone explains, is that Venmo would take a cut—its standard rate is 2.9 percent plus a small flat fee, which is at the higher end of what merchants pay for a typical credit-card transaction—of not just in-app purchases like these, but of in-person transactions at physical checkout counters, where customers spend trillions of dollars a year.

This is where the social feed comes in. “You walk into any retailer, any restaurant, any service provider—what do they want you to do? Like them on Facebook, follow them on Twitter,” Crone says. Working with retailers would give Venmo a business model similar to credit-card issuers and processors—“but with much more upside,” he says, “because the retailers spend far more trying to get you to like them on Facebook and follow them on Twitter and all these other things that they could just get as a byproduct of the payment.” That is, if someone paid for a taco using Venmo, their friends might see where they ate lunch.

One limit on this strategy’s effectiveness is that consumers might not be eager to publicize every one of their purchases. But Venmo is aware of this: In the year or so since it started trying its service out with a few businesses, the default setting has been for payments not to be shared in the social feed. Still, Bill Ready, PayPal’s chief operating officer, recently toldBarron’s that when the initiative is expanded, “social aspects will be not only present, but also be what’s most attractive to our users.” And Fast Company has reported that a job-application prompt for prospective Venmo employees last year mentioned research finding that “Venmo users are more open to purchasing at new businesses … that they learn about from friends on Venmo.”

But the other, even more lucrative aspect of becoming merchants’ preferred means of payment is access to information about where customers are spending their money. “The real value is in the data, and the ability to render customized ads and offers, and generate a revenue stream from that,” Crone says. “We estimate that rak bank online business value of mobile payments per enrolled active account is worth more than $400 per year in revenue, to whoever does it—Venmo, Apple Pay, Android Pay, Samsung Pay, a bank, Visa, or Mastercard."

If Venmo or another service were to gain access to this payment data, the typical recipients of it would start missing out. Even though digital-payments apps are built on top of banks’ infrastructure, banks wouldn’t see the details of consumers’ spending, but instead just requests from an app to add or withdraw money from an account. Referring to the value of owning the platform that consumers directly interact with, Crone says, “The one who enrolls is the one who controls”—a phrase he went on to repeat five times in one conversation I had with him.

Venmo’s social feed is something that banks would by their nature have trouble reproducing.

Crone thinks that banks are worried about Venmo’s ambitions. Banks have rightly recognized that convenience, affordability, and ease of use are not characteristics that appeal uniquely to 20-somethings, and so they have in recent years collaborated on a payment platform that does more or less what Venmo does. The product of that collaboration, called Zelle, began showing up last month on the screens of tens of millions of Americans who use mobile-banking apps on their phones.

Zelle differs from Venmo in three important ways. The first is that Zelle appears within users’ banking apps, as opposed to being an app all its own. The second is a consequence of the first: Because Zelle was developed by banks and appears in their apps, transfers will register in users’ bank accounts in minutes, whereas with Venmo, that currently takes days. (Zelle’s association with banks is also a selling point when it comes to security, which Venmo has in the past gotten some bad publicity for, but has since seemed how banks make money have gotten under control.) Third, Zelle lacks Venmo’s performative social component.

And, technically speaking, Zelle is not new—the name and the bright purple buttons reading “Send,” “Request,” and “Split” are just the consistent branding given to a payments platform called clearXchange that banks have been using, under other names, for years. In fact, last year, clearXchange processed about $175 million in payments per day, while Venmo’s daily rate was only $54 million. Still, the pre-Zelle clearXchange, which wasn’t given a consistent name or look across banks, left room for more-intuitive apps like Venmo to claim a chunk of the market. They had plenty of time to do that, given how long it took for more than 30 banks, normally in competition with each other, to cooperate and release a cohesive product.

Looking to the future, Crone notes that Venmo’s social feed is something that banks would by their nature have trouble reproducing. “You expect your billpay healthcare gov to keep things private,” he says. “With How banks make money, you expect them to publicly post.” (When I talked to Melissa Lowry, the vice president of chase personal loan application and branding at Early Warning, the industry group that helped develop Zelle, she optimum cable pay bill that Zelle could add a social component down the line, if banks decided that was something they wanted.)

Of course, because of its reputation for security and synchrony bank paypal credit phone number, Zelle is arguably much better positioned than Venmo to handle business-to-consumer disbursements, such as when, instead of sending a check, an insurance company transfers a customer money for making car repairs, or when a market-research firm compensates people for participating in a focus group. ClearXchange has already been handling such payments, and it’s not hard to imagine people using Venmo at a fancy restaurant to broadcast their good taste and Zelle for payments that say less about their social status than they do about mundane financial chores.

And at the moment, Venmo’s ability to capitalize on its social dimension is far from certain. When I asked Talie Baker, a senior researcher at Aite Group, about what Crone observed, she wrote in an email, “I think it’s a good point he makes that companies won’t mind the transaction fees with the built-in advertising BUT, consumers LOVE their credit cards.” (That said, PayPal appears ready to work with credit-card companies in order to gain a foothold at physical checkouts.)

An additional wrinkle, of course, is Venmo depends on banks’ payment systems in order to function, so it might be hesitant about encroaching too much on their revenue streams. But if Venmo started getting a larger market share than the banks are comfortable with, would they try to do something about it? “That'd be a pretty dangerous and bold move,” Crone says. He adds that in some ways the banks actually don’t mind that services like Venmo have gotten bigger, because they have the banks processing payments that they wouldn’t have processed otherwise. “If they are not able to position themselves in the social sphere of payments,” he says, “then they'll still participate in the back-end plumbing."

After the announcement last month of Zelle’s impending rollout, a number of media outlets presented it as a direct competitor to Venmo. Reuters called it banks’ “answer” to Venmo. Engadget said that Zelle is “tak[ing] on” Venmo. Bloomberg went so far as to wonder if the app was a “Venmo killer.”

In truth, the dynamic between the two payment platforms will not be quite so oppositional; paper money and checks are still so prevalent that Zelle and Venmo could both gain immense popularity and still not run up against each other for many years. Crone thinks the most likely outcome is that the various companies involved with payments will end up cooperating as much as they compete. “There won’t be one mobile payment to rule them all,” he says. As much competition as there currently seems to be, the future that both Crone and Baker foresee for digital payments leaves plenty of room for emoji—and more ☮️  than ⚔, at that.


How Do Digital Banks Make Money?

There are more and more challenger banks every year. They’re all trying to get customers to their apps and away from traditional banks. The siren call is that of no fees and no queues in the bank downtown. 

But, the question is, how do digital banks make money? What exactly is their business model? How profitable is it to them?

Digital banks are basically startups. And we all know that the start-up world is notorious for its focus on expansion rather than profitability. Getting as many new users or customers is what a red rag is for the bull. 

The thought process is that as long you get more and more customers, you’ll figure out how to monetize them in the future. 

But now that more digital banks have several million or even tens of millions of customers, how do they stay afloat, and how do they make their money? Do they even make money? How to get users to pay for some of the services?

Digital banks make money by: 

  • raising funds from institutional investors 
  • Getting interchange fees
  • Offering premium accounts
  • Offering SME accounts
  • Extending credit cards
  • Having loans and mortgages
  • Charging overdraft fees
  • Providing a marketplace

Let’s explore in more detail all the ways that digital banks make money. 

Raising funds

Arguably the “easiest” way to make money is to raise funds from investors. Venture capital firms are lining up to invest in digital banks not only in the US or UK but worldwide – wherever an opportunity presents itself. 

Major neobanks have raised more than a billion dollars and sometimes several billion. Let’s name a few of the more notable ones:

  • Revolut (UK) – $1.7B
  • Chime (USA) –  $2.3B
  • Starling (UK) – $922M
  • N26 (GER) – $819M
  • Wise (UK) – $1.3B
  • Nubank (BRA) – $2.3B
  • SoFi (USA) – $3B

As you can see, the amounts are mindboggling, and it’s “very easy” to become a unicorn when VCs are waiting in queue to line your pockets even when profitability is nowhere in sight. 

Digital banks aren’t unique in this regard. The world is full of unicorns that will probably never be profitable. Two of the most famous examples include Uber and Airbnb.  

So, raising funds every few years is still the best way to make money for challenger banks at the moment. 

Interchange fees

People come to expect that digital banks will have accounts that are free of charge and where most day-to-day financial services will be free, including ATM withdrawals, transfers, transactions, cards, and maintenance fees.

This is probably what 90% of us use our bank accounts for. And it’s all for free. But there is a fee that’s hidden. Well, it’s hidden from customers, not from merchants. It’s the interchange fee that Visa and Mastercard charge sellers whenever a customer buys something from them with the card. 

It’s why you often see in smaller “mom and pop” shops that they only accept cash. Their margins are already razor-thin to share some of it with card companies. 

Some of that interchange fee will go from Visa to the digital bank. Those are typically tiny amounts, but they add up the more customers you have who are happy to spend their hard-earned money on stuff they mostly don’t need. 

We also wrote recently about Chime and how they make money specifically.  

Premium accounts

Offering a premium account with swanky features such as a metal card, travel insurance, overseas medical insurance, better savings rates, lounge passes, etc., are an excellent way to make a paying subscriber out of a “freeloading” app user. 

By offering two or three tiers for your customers to choose from, your chances of getting more money from a customer are looking good. 

Offering free accounts can be costly to fintech companies. And the more customers you have, the more money you can lose. One such example is Monzo, which was losing £30+ per customer. Ouch. 

Although premium accounts can make some profit for the company, or at least not lose it, that’s still not a big moneymaker for them. 

SME business accounts

SMEs are notably underserved, and they’re used to being fleeced by big banks. If you can get a small or medium-sized business under your roof, you can earn good money for years to come. 

By offering a free account and then charging for some of the services is one way to go. The other is to straight up charge for a business account.  

Entrepreneurs love to bank digitally. It saves them valuable time that they, or their people, can spend on other vital parts of their business. There’s a lot of room to grow here for digital banks, especially in today’s world when everyone wants to be an entrepreneur. 

Credit cards 

Now we’re getting to the juicy stuff. Credit cards. The more savvy digital banks offer credit cards to customers from the onset as they are one of the most profitable financial products for banks in general. 

Banks can earn money from credit cards in several ways. There’s the annual fee that’s often waived for the first year or entirely. Then there’s the interest fee that is charged when a customer fails to repay their balance in a month. That’s the biggest revenue generator. The average credit card interest rate is around 16% in the US.

And then there are the already mentioned interchange fees that they collect from merchants or the credit card issuing bank they’ve partnered with. Lastly, there are late, balance transfer, and cash advance fees. 

As you can see, it’s worthwhile for a digital bank to have credit cards in its portfolio. They’re more prevalent in some territories than in others, so they might not be worthwhile everywhere in the world.   

Some neobanks that don’t have a banking license can offer credit cards by partnering with a licensed partner to get regulators on board. 

Loans and mortgages

Lending money to clients is the most straightforward way to profit. People will always need more money than they have, and they are willing to pay for it. 

Mortgages, especially, are the most profitable financial product for banks. They are how banks make money most significant transactions that people will make in their lives. 

Not all challenger banks are ready to offer mortgages. Particularly the new banks need time to establish themselves in the market and to further mature. However, they can start out by providing personal loans to customers as a great way to lock them in and earn income from interest.


Overdrafts are BIG money-making machine for banks. A study by the Brookings Institution has revealed that overdraft fees accounted for more than 50% of 6 reputable banks’ net income. Spectrum brighthouse bill pay same survey found that 9% of people who overdrew their bank accounts more than 10 times per year pay a massive 80% of total overdraft fees collected.

It’s rare for digital banks to even offer overdrafts. During the pandemic, some of them started to scrap overdraft fees altogether as a way to help their customers. An example of that is Ally. 

They started out by reimbursing overdraft fees in early 2020 to help during the pandemic and then subsequently scraped them.

Still, it’s an easy way to earn money for traditional and digital banks because a single overdraft can cost you $35. I’d rather be a bit embarrassed at the counter than pay how banks make money amount. 

>> Read our Ally bank review


Once digital banks have acquired a healthy amount of customers, they can make a marketplace out of their app. Banks don’t have to develop and offer their own trnx f stock price. They can simply lend their space in the app to other financial companies like lenders, insurance, or accounting firms. Banks get a commission for every customer referred, and the companies that are included in the marketplace get a paying customer. It’s a win-win situation. 

The marketplace can cover a wide array of services that are attractive to both personal and business customers. Apart from the aforementioned lending, accounting, and insurance companies, the marketplace can include HR, pensions, tax, legal, communications, loyalty programs, payments, investing, mortgages, utilities, and more. 

A well-documented example that is used the most is UK’s Starling Bank. They are one of the few profitable challenger banks out there. They offer a range of third-party products to enhance their business account.

The bottom line

Challenger banks face a lot of difficulties trying to monetize their customers. Only a handful of digital banks in the world are profitable at the moment. That is somewhat understandable as they’re trying to capture as much of the market as fast as they can. That leaves profitability in the backseat. 

Still, as you can see, there are many reliable ways to make money. Relying solely on raising funds from venture capital firms and depending on interchange fees are good for starters. Still, it’s important to start exploring other ways of making money as soon as possible without alienating their existing customer base. 


Adrian Volenik( Chief Editor )

Adrian Volenik is a fintech enthusiast who loves testing and reviewing digital banking apps and financial products in general. How many digital banking accounts can one man have? Not enough, if you ask Adrian. As his wallet will soon explode if he doesn’t cut back on the number of cards.


How Banks Make Money and How You Can Make Money Like A Bank

Woman Walking by Bank

I am sure you realize that the bank pays you for keeping deposits there.  Many young people do not have loans, so they have never thought out the process of banks making money.  Why should they even care about keeping you as a customer?  Here is how banks make money and a few ideas on making money in the same way.

To get the first questions out of the way, banks make a ton of money from different types of fees.  NSF (overdraft) fees, low balance fees, transfer fees, wire fees, origination fees, and anything else that ends in “fee” is a hugely profitable area for most banks.  NSF fees are one of the top money makers for the industry.  Out of network ATM fees are pretty nice for them as well.  Don’t pay them, negotiate how banks make money away or avoid them by knowing how your bank works.

Now, for the traditional bank money making technique.  Banks borrow money at a lower rate than they lend it to someone else.  I think it is a fairly simple process.  Here is an example:  Bank borrows $1,000 (from five people’s deposits) for 1% interest per year.  Another customer decides to buy a $5,000 car and needs a loan.  The bank loans that person the money at 6%.  That gives the bank a 5% margin (6%-1%), or $250, in profit.

Banks do that a lot.  That is the scale of “it takes money to make money.”  If the bank has 1,000,000 customers with $1,000 and loans out 80% (assuming a 20% reserve requirement), they can earn $40 million in profit with a 5% spread.  Even if 5% of the loan go bad, they still earn massive profits.  The currently subsiding financial crisis was contributed to by a high number of loans becoming delinquent and forcing the banks to take large losses.

So, how can you make money like a bank?  How can you borrow money at a low rate and loan it out at a higher rate?  There are several options.  Those include private loans, P2P lending, and gaming the no interest introductory rate system.

Private Loans:  These are a good idea for wealthy individuals who have a high tolerance for risk.  You can make an under-the-table loan to anyone with any terms that you see fit.  Make sure to get a legal contract in writing so you can enforce your side, even for friends and family.  There is a big risk that they may stop paying and you can’t do anything about it.

P2P Lending:  I am a big fan of P2P lending if you have the right fit.  P2P (Peer to Peer) lending cuts out the bank.  You give the money, generally in $25 increments, to someone who needs a loan.  You get the payments back for your share of the loan along with all interest.  P2P lending facilitators, such as Lending Club and Prosper, take a small cut for being the middle man for the loan.  If you diversify and loan money across many people, you are lowering your total portfolio risk.  Lending Club has a detailed prospectus if you are interested.

Gaming the System:  This takes a lot of time and effort, but you can make a little extra cash from gaming zero interest periods from credit cards and loan.  Beware, however, that opening and closing credit cards has a big impact on your credit score.  How does it work?  If you see an introductory rate credit card with no interest and no fees, you can withdraw your entire credit line (hurts your credit score also) using a credit line check (sometimes has fees) and put the money into a high interest savings account or CD.  Because you pay no interest, you keep the entire profit of the interest you earn from the CD or savings account.  If you invest in other, higher returning places, such as stocks, you risk losing the initial investment and having to pay back the credit card loan at a loss or paying interest.  I don’t recommend this, but some people do.

In all, it is tough to be the bank.  The old adage “it takes money to make money” is true.  There are big risks in playing banker, but there are big yields if it is done right.  But if mafia loan sharks can do it, you can too.  Just make sure things are legal, clean, and you are aware of any potential losses.

Have any of you tried these, or other, methods to earn interest from loans or the borrow/loan spread?  Please let us know in the comments.

Filed Under: Banking, Debt Management


How Do Banks Make Money?

Banking / Banks

Savings, businessman holding gold coins standing in front of ATM machine waiting.

sesame / Getty Images

Do you ever wonder how your bank can afford its location, overhead and staff? Or, how banks make money when they give away free checking accounts and pay interest on savings? It’s common knowledge that top-level bankers are quite well paid — but where the income comes from is less clear.

Here’s a closer look at how banks and credit unions earn money — on your money, no less.

Banks Make Money Off Deposits

Banks know how to leverage money in genius ways. When you deposit money into your savings account or certificates of deposit, your bank will pay interest as an incentive for you to park your cash there. That’s because banks need your money to make loans. Your cash isn’t really physically in your account, waiting — your bank is making lucrative deals lending it to other customers and businesses until you need it.

This might sound alarming, but don’t worry. Your money will be there when you want to withdraw it. The Federal Reserve insures your money against loss through the Federal Deposit Insurance Corporation for up to “$250,000 per depositor, per insured bank, for each account ownership category.”

So how do banks make money on savings accounts? In a nutshell, by lending out the money in your account(s) and charging more interest than it pays you.

Imagine this: you currently have $20,000 put away in a high yield savings account at a 1.90% annual percentage yield. You’ll be earning about $384 per year, or $32 per month, in interest. But your bank can lend your $20,000 out at the following rates:

  • 24.74% APR for a credit card
  • 3.83% APR for a home mortgage
  • 2.49% APR for an auto loan

Your bank might pay you $384 over a year but it can make thousands off lending your money. Now imagine that process repeated with every customer with a savings account. That’s a positive net interest margin — an indicator that the bank is profitable because it’s making more money than it spends.

Banks Make Money With Bank Fees

Fees are one of the more obvious ways banks make money. Imagine millions of customers paying the following banking fees on a regular basis:

  • Account fees for having a bank account
  • Application fees from loan applications
  • ATM fees for cash withdrawals
  • Commissions charged for investment services or making trades
  • Penalty charges like credit card late fees and bank overdraft fees

And then there are credit cards. How do banks make money off of credit cards? Charging interest when consumers don’t pay their card balances in full each month is one way. But credit cards have a whole set of fees, like over-the-limit fees, late-payment charges and annual fees you pay just for having the card.

Banks charge fees to earn money and consumers suntrust bank locations near me now to avoid fees to save money. It’s a battle many consumers lose, and the fees add up to a tidy profit for a bank.

Banks Make Money With Interchange Fees

Retailers pay interchange fees every time a customer uses a credit or debit card in a sales transaction. Interchange fee rates are set by the credit card companies and are normally a percentage of the purchase plus a flat rate.

Here’s a simplified example: The interchange rate set by a credit how banks make money provider for each transaction is 2.00% plus $0.15. You buy something for $100 with your debit card. The store would pay an interchange fee of $2.15. The store keeps $97.85 of the purchase price, and the $2.15 interchange fee goes to the bank that provided you with the credit or debit card.

Banks Make Money Through Investments

Investment banks are different from commercial banks. They make their money by selling services to companies, governments and investment funds instead of earning their money from consumers. Although this doesn’t apply to consumers, it’s good to know it’s another way banks make money, thereby making it possible for you to enjoy your free checking account.

Investment banks earn fees and commissions from:

  • Trading shares, currencies or other products
  • Giving advice to clients on companies they might want to merge with or how they can save on tax through investments
  • Financing companies through commercial bank loans or by issuing shares or corporate bonds to help fund a company
  • Researching companies and industries and selling the findings

Bank Earnings Examples

Visual Capitalist broke down a McKinsey & Company Panorama report showing that U.S. banks made $403 billion in after-tax profits in 2018. Here’s a closer look at the top three financial institutions to see how they made their money:

How Do Banks Make Money?

JPMorgan ChaseWells FargoBank of America
Total Customer Deposits (in millions)$678,854$1,286,170$1,381,476
Total Loans (in millions)$486,689$953,110$946,895
Service Charges and Fees on Deposit Accounts (in millions)$4,697$5,372$4,495
Net Income (in millions)$32,474$22,393$28,147

How do banks make money on checking accounts and so many other products and services if they’re free? They get creative and find other ways to earn income. So next time you visit your local branch, don’t feel too guilty about taking some extra candy.

About the Author

Cynthia Paez Bowman is a personal finance writer with degrees from American University in international business and journalism. Besides writing about personal finance, she writes about real estate, interior design and architecture. Her work has been featured in MSN, Brex, Freshome, MyMove, Emirates’ Open How banks make money magazine and more.

how banks make money

5 Replies to “How banks make money”

  1. Full of info..madami matututo dito sa nai share mo..Thanks for posting. Bagong kaibigan..inunahan na kita. dalaw ka na lng din. God bless

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