A bank is a financial institution that accepts deposits from the public, creates credit, and provides loans. Banks play a crucial role in the economy by facilitating the flow of money and capital. Banks are regulated by regulatory body of that country, for example in case of India, RBI or Reserve Bank of India acts as a regulatory for all banks and financial institution of the country. Now lets come to the point of, how bank earn money. We have listed down the following points on how a bank earns money:
Interest on Loans: While taking loan from a bank, borrowers need to pay interest along with the loan amount. The additional interest charged by the bank is an income source.
Interest on Investments: Banks invest the surplus amount on various schemes like government bonds. Interest from these investments also add an income source to the bank.
Fees and Charges: Banks often charge fee on various product and services like: Account maintenance fee, fund transfer fee, Debit Card fee, etc
Credit Cards: Credit Card is a major source of revenue for the bank. Bank earns MDR (Merchant Discount Rate) fee for every transaction from the merchants. Normally the MDR fee can be upto 2% - 3% depending upon the bank and type of card. Additionally, a credit card company also earn from the interest charged on the unpaid amount or the penalty charged on the delay payment.
Mortgages: Banks earn money through the interest on mortgage loans provided to home buyers.
Interbank Lending: Banks engage in lending to each other, earning interest on these short-term loans.