Commercial Banks are making serious money from “You” every single day
You may be wondering how. Well, in this article we have exposed some of the little ways your favorite commercial bank is making money from you.
It’s going to be a long read. Let’s get to it!
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From The Basics- A Brief History of Commercial Banks
Banking as a whole can be traced back to ancient times. Infact the word “bank” is derived from the Italian word “banco” meaning desk/bench. It was used during the Italian Renaissance era by the Florentine bankers, who carried transactions on a desk covered by a green table cloth
The term Commercial Bank was used in the United States to distinguish it from an investment bank due to differences in bank regulation.
After the great depression in the United States, the U.S. Congress required that commercial banks only engage in banking activities, whereas investment banks were limited to Capital investment activities.
Commercial banks can be categorized into different types based on various criteria. Here are some common types:
Categories Of Commercial Banks
- Retail Banks: Also known as consumer banks, these banks primarily serve individual customers and offer services such as savings accounts, checking accounts, loans, mortgages, and credit cards.
- Corporate Banks: These banks focus on providing financial services to businesses, including corporate loans, trade finance, cash management, and investment banking services.
- Universal Banks: Universal banks offer a wide range of financial services to both retail and corporate customers. They provide banking, investment, and other financial services under one roof.
- Community Banks: Community banks are locally owned and operated banks that primarily serve the financial needs of a specific community or region. They often emphasize personalized customer service and community involvement.
- Online Banks: These banks operate primarily online and do not have physical branches. They offer banking services through internet and mobile banking platforms, providing convenience and often lower fees to customers.
- International Banks: These banks operate globally, with branches and subsidiaries in multiple countries. They cater to the needs of multinational corporations, global investors, and individuals with international banking requirements.
- Development Banks: Development banks focus on providing long-term financing for development projects in sectors such as infrastructure, agriculture, and housing. They play a crucial role in promoting economic development and poverty reduction.
- Savings Banks: Savings banks traditionally focus on promoting savings and homeownership by offering savings accounts, mortgage loans, and other related services. They may be owned by their depositors or operated as commercial entities.
Having looked at some of the categories of commercial Banks, let’s dive into the major role it plays in a nation.
The Role Of Commercial Banks
Providing financial services to the general public and business, ensuring economic and social stability and sustainable growth of the economy is the general role of a commercial bank.
However its most significant role is credit creation. The function of credit creation is generated on the basis of credit and payment intermediary. Commercial banks use the deposits they absorb to make loans.Here is a perfect illustration.
If a customer wanted to get a loan from the bank, they would not provide cash to that customer ( borrower). Instead, they’ll d open a deposit account from which the borrower can withdraw. In other words, while sanctioning a loan, they automatically create deposits.
Other Functions of A commercial Bank includes the following
- They accept various types of deposits from the public especially from their clients, including saving account deposits and fixed deposits.However, these deposits are returned because the customer cab demand for it after a certain time period.
- Provision of loan and advances of various forms. These includes [overdraft] facility, cash credit, bill discounting, money call, etc.They can also serve as trustees for wills of their customers
- They carry out agency functions such as:
- To collect and clear cheques, dividends, and interest warrant
- To make payments of rent, insurance premium
- To deal in foreign exchange transactions
- To purchase and sell securities
- To act as the trustee, attorney, correspondent and executor
- To accept tax proceeds and tax returns
Utility functions include:
- To provide safe deposit e to customers
- To provide money transfer facility
- To issue travellers cheque
- To act as referees
- To accept various bills for payment: phone bills, gas bills, water bills
- To provide various cards such as credit card and debit card
Now that you’ve learnt about the history, roles and functions of a commercial bank, let’s get to the real business of the day, which is our they make money from you.
How Commercial Banks Make Serious Money From Their Customers
There is no doubt that your favorite commercial bank is making tons of money from your daily transactions even while you are asleep.
Every time you get an alert, either a debit or credit, your favorite commercial earns from it
Here is how;
Banks make money by imposing service charges on their customers. These fees vary based on the products, ranging from account fees (monthly maintenance charges, minimum balance fees, overdraft fees, and NSF (non sufficient fund charges), safe deposit box fees, and late fees. Many loan products also contain fees in addition to interest charges.(investopedia.com)
Banks also earn money by lending money to their clients. They lend money from customer deposits. However, the interest rate charged by banks on the money they borrow is lower than the rate charged on the money they lend. For example, a bank may charge savings account customers 0.25% in interest per year, while charging mortgage customers 4.75%.
Many banks charge no interest (or very little) on checking account balances to their customers, and they also charge interest rates on savings accounts that are much lower than US treasury bond (t-bond) rates.
Charging you on all your transactions is the way commercial Banks earn money.However, they are some charges you can avoid
Let’s go through some them together
3 Common Bank Charges And How To Avoid
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Monthly maintenance/service fee
You know that debit alert you receive at the end of every month. It can be as low as $4 to as high as $25. It is referred to as monthly maintenance/ service fee. In some countries, this can be avoided. Here is how; open both a checking and a savings account at the same bank or maintain a minimum balance in your account.
You can also set up a monthly direct deposit. That is enough to waive the monthly Charges
However, you can choose a checking or savings account with no monthly fees from the start.
CNBC Select rated the best no-fee checking accounts and Capital One 360 Checking ranked best overall for its top-rated mobile app, physical bank locations, and customer experience.You can check them out, if you are in the U.S.
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Out-of-network ATM fee
ATM fees from both your bank and the ATM operator can add up when you withdraw cash often.
Use only ATMs in your bank’s network, which can usually be found on their website. Most banks’ mobile apps help users to locate and use the nearest fee-free ATM.
You can withdraw a large sum of money so the fee is only a one-time charge
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Excessive transaction fee
When savings account holders withdraw over the federal threshold, which is six free withdrawals and transfers per month, an excess transaction fee is levied. However, please note that this threshold is currently waived during the coronavirus epidemic outlined in regulation D.
This fee can be easily avoided when you use your checking account as your everyday account for routine withdrawals, like paying bills.
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