{"id":13459,"date":"2020-09-15T10:43:02","date_gmt":"2020-09-15T17:43:02","guid":{"rendered":"https:\/\/canary.kcprod.info/blog\/?p=13459"},"modified":"2022-01-11T17:12:17","modified_gmt":"2022-01-12T01:12:17","slug":"how-traditional-banks-make-money-from-you","status":"publish","type":"post","link":"https:\/\/canary.kcprod.info/blog\/how-traditional-banks-make-money-from-you\/","title":{"rendered":"How Do Banks Make Money?"},"content":{"rendered":"\n

Bank branches may seem like an antiquated way to conduct banking in this day and age (we certainly think so), but traditional banks\u2019 business models are built around them. We\u2019ve written before<\/a> about how these branches provide an extremely poor customer experience and, infuriatingly, cost you $200 (or more!) per year even though you have no interest in visiting them. <\/p>\n\n\n\n

Still, banks have to generate revenue in excess of what it costs them to operate branches whether you like it or not \u2013 and in order to do that, they get creative about finding ways to make more money off of you. Here we\u2019ll explain three major ways traditional banks do that and what it means for you as a consumer.<\/p>\n\n\n\n

They don\u2019t pay you interest on your deposits<\/h2>\n\n\n\n

The biggest way banks make money is by minimizing the interest they pay you on your deposits. In banking jargon, this is known as maximizing their \u201cnet interest margin<\/a>\u201d \u2013 but it\u2019s just a fancy way of saying they\u2019re making money on your money and not passing it along to you.  When you deposit money at your bank, it doesn\u2019t just sit there. Your bank loans it out and earns interest on those loans. Ideally, your bank would then share that interest with you. In reality, they seldom do. Banks have a strong incentive to pay you as little as possible because banks with the lowest cost of funds (read: those that pay the least interest) tend to have the highest relative valuations (meaning they\u2019re seen as more profitable). In short, they maximize the interest they earn while minimizing what they pay you on your own deposits.<\/p>\n\n\n\n

Let\u2019s look at what this means for you. Say you have a checking account that earns no interest (which is fairly common). You deposit $10,000 into that account and your bank then loans out your cash. If your bank earns 2.8% loaning your money out for mortgages but pays you 0% APY, they\u2019re earning a 2.8% net interest margin on your cash that\u2019s equivalent to $280 over the course of a year \u2013 and you\u2019re earning nothing. They could raise your APY, but then they\u2019d make less money. <\/p>\n\n\n\n

Some banks (like First Republic Bank, for example) attempt to confuse the issue by offering what they call a \u201cpreferred interest rate\u201d on loans like mortgages to lure you into maintaining a large account balance with them. But don\u2019t be fooled: these so-called \u201cpreferred rates\u201d rarely make economic sense<\/a>. You\u2019re paying for this lower rate by keeping your money in an account that earns little or no interest. To make matters worse, your rate isn\u2019t actually \u201cpreferred.\u201d If you shop around, you can find a better one.<\/p>\n\n\n\n

They charge you unnecessary fees<\/h2>\n\n\n\n

Speaking of minimum balances, most banks will charge you a fee if you fall below a particular account balance. Worse still, you can trigger this fee if you fall below the threshold even once \u2013 even if your average account balance far exceeds the minimum and even when you hold a balance way above the threshold in another account at the same bank. This is just one example of the many account fees<\/a> banks charge to make money off of their customers.<\/p>\n\n\n\n

Another example of a trigger-based fee that generates a significant amount of revenue is the overdraft fee. Your bank will charge you a significant fee (often $30 or more) if you overdraft your account. What\u2019s worse is that your bank will do this even when they know you have a pending direct deposit that will settle in a day or two. <\/p>\n\n\n\n

Banks also make money on the fees associated with currency exchange and wire transfers. In general, you\u2019ll pay a premium to exchange currency at most retail banks compared to what you\u2019d pay elsewhere. When you send a wire transfer, you typically have to visit a bank branch because the limits to send a wire transfer without visiting a branch can be frustratingly low. You\u2019ll also pay your bank a fee as high as $35. What\u2019s even more egregious is that many banks charge you to receive<\/em> a wire even in cases when they didn\u2019t do the work of setting it up. <\/p>\n\n\n\n

They slow down your money movement<\/h2>\n\n\n\n

In the early days of the U.S. banking system, it took days to move money around. Before ACH transfers, there was the Pony Express. Whenever you paid someone by check, it took days to clear because the check had to physically arrive at the bank where it could be accounted for. There was really no way around this, and it led to a phenomenon called \u201cfloat\u201d where slow money movement caused money to exist in two places at once.<\/p>\n\n\n\n

Now there\u2019s no reason it should take multiple days for a check to clear \u2013 but it still does. For the most part, it\u2019s something bank customers have gotten used to and banks have quietly profited from. When you send a check electronically, your bank often deducts the money from your account the moment you hit \u201csubmit\u201d even though they may not send the check for several more days. During that time, your bank has access to your money and can earn interest on it until the funds leave the bank, but you cannot. <\/p>\n\n\n\n

Another example of this is how your bank generally receives your paycheck from your employer two days before they make it available to you. During that time, they earn interest loaning out your money while you can\u2019t access your pay. Over the course of a year, that means your bank is making 48 days\u2019 worth of interest on your pay before you can even access it.<\/p>\n\n\n\n

Doing things differently<\/h2>\n\n\n\n

At Wealthfront, our mission is to build a financial system that favors people, not institutions<\/a>. In order to do that, we\u2019re reinventing banking. After all, banks aren\u2019t built to benefit you \u2013 they\u2019re built to benefit banks. <\/p>\n\n\n\n

Unlike traditional banks, Wealthfront puts you and your needs first. Our model is fully branchless which means we don\u2019t need to get $200 a year from you just to operate branches you don\u2019t want to visit. We don\u2019t nickel-and-dime you with a rock-bottom APY \u2013 instead, we pay you interest on your deposits because we believe if we\u2019re making money, you should too. We don\u2019t charge account fees. And we don\u2019t slow down your money movement because we fundamentally believe that your money is yours<\/em> and you should have access to it as soon as we get it. When you direct deposit your paycheck to a Wealthfront Cash Account<\/a>, you can get paid up to two days early and we\u2019re working hard to help you move your money even faster between all your important financial accounts. And soon, we\u2019ll be able to handle all your monthly banking needs.<\/p>\n\n\n\n

We believe your banking relationship should benefit you, not just your bank. When you make Wealthfront the main relationship for your banking needs, you can rest assured we\u2019ll make money with you, not from you.<\/p>\n","protected":false},"excerpt":{"rendered":"

Bank branches may seem like an antiquated way to conduct banking in this day and age (we certainly think so), but traditional banks\u2019 business models are built around them. We\u2019ve written before about how these branches provide an extremely poor customer experience and, infuriatingly, cost you $200 (or more!) per year even though you have […]<\/p>\n","protected":false},"author":129,"featured_media":13593,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"inline_featured_image":false,"footnotes":""},"categories":[2390],"tags":[2406,2374,1296],"coauthors":[82],"class_list":["post-13459","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-saving","tag-bank-branches","tag-banks","tag-fees"],"acf":[],"yoast_head":"\nHow Do Banks Make Money With Your Money? | Wealthfront<\/title>\n<meta name=\"description\" content=\"Here we\u2019ll explain three major ways traditional banks make money with your money, and what it means for you as a consumer.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/canary.kcprod.info/blog\/how-traditional-banks-make-money-from-you\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"How Do Banks Make Money With Your Money? 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