How Banks Make Money

Banks loan money to customers and charge interest, but there's more to the story.

By Matthew Frankel, CFP – Updated Jun 6, 2025 at 10:14 PM | Fact-checked by Frank Bass

Key Points

Banks earn via services like loans and managing corporate deals.
Charges include overdraft fees and loan origination fees.
Net interest margin is key to banks' earnings from loans.

Have you ever wondered how banks make their money? The banking business itself can be quite complex, as you might imagine.

However, the main ways in which banks make money can be surprisingly easy to understand. Here's a quick rundown of the two main ways banks make money and some key details to know about each one.

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A person speaks with a bank teller. — Image source: Getty Images.

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About the Author

Matt Frankel, CFP, is a contributing Motley Fool stock market analyst and personal finance expert covering financial stocks, REITs, SPACs, and personal finance. Prior to The Motley Fool, Matt taught high school and college mathematics. He holds a bachelor’s degree in physics from the University of South Carolina, a master’s degree in mathematics from Nova Southeastern University, and a graduate certificate in financial planning from Florida State University. He won a SABEW award for coverage of the 2017 Tax Cuts and Jobs Act. He is also regularly interviewed by Cheddar, The National Desk, and other TV networks and publications for his financial, stock market, and investing expertise.

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Overdraft or returned item fees: Banks typically assess a charge if a transaction makes a customer's account go into the negative or if it is rejected due to lack of funds. The typical overdraft fee can be as much as $35 as of 2025, but banks have been under pressure to lower these in recent years.
Monthly account fees: With checking accounts in particular, it's common for a modest monthly fee to be assessed. There is usually a way for account holders to avoid the fee, such as by setting up direct deposit. This type of fee is common with branch-based bank accounts but not with online banks.
Interchange fees: Interchange fees are typically charged when customers use a bank's credit or debit card to make a purchase -- but it's the merchant's bank that pays it, not you. Let's say that you have a Bank of America (BAC -0.55%) credit card and use it to make a purchase at a retail store. The retailer's bank must pay an interchange fee to the bank that issued the card -- in this case, Bank of America.
Loan fees: Banks often charge origination fees when making loans. For example, it's not uncommon to pay an origination fee of $1,000 or more for a personal loan or a large loan such as a mortgage.
Other account fees: When you look at a checking or savings account's fee schedule, there is probably a list of services you could be charged for. In addition to those already discussed, common fees include non-bank ATM withdrawal fees, international debit card transaction fees, fees for money orders and cashier's checks, and wire transfer fees.
Investment banking fees: Banks that have investment banking operations make money from the advisory fees they charge to clients. For example, if a company wants to go public and complete an IPO, an investment bank would get advisory fees for facilitating the process and advising the company on the best course of action.

Interest income

When it comes to interest income, net interest margin is the primary revenue generator. Net interest margin, or NIM, refers to the spread between the interest income banks take in on loans and the interest the bank pays for deposits after the bank's costs are accounted for. For example, if a bank has a $100 million loan portfolio and its net income from those loans is $2 million, it has a net interest margin of 2%.

Net interest margins depend on a few factors, such as the efficiency of the particular banking institution and the various types of lending the bank specializes in.

For example, credit card loans tend to have higher interest rates (and more risk) than mortgages and auto loans. They also depend on the interest rates the bank pays on deposits.

How credit unions work

Unlike traditional banks, credit unions are nonprofit businesses.

Credit unions charge interest and fees, just like banks, but they are typically only focused on covering their expenses and not on delivering profits to shareholders. Credit unions are technically owned by their members, and their mission is to give members the best rates, fees, and yields on deposits they can while covering the costs of their operations.

Credit unions are typically designed for consumers and small business banking. They are not investment banks.

How Banks Make Money

Banks loan money to customers and charge interest, but there's more to the story.

Key Points

Related investing topics

Investing in Top Fintech Companies

Best Bank Stocks for 2025

Top 3 Financial Stocks for 2025

Are Bank Stocks Safe? The Pros and Cons

About the Author

Our Guides

Premium Investing Services