Banks often advertise things like free checking, free savings accounts, and even interest paid on your deposits. At the same time, they operate expensive branch networks, employ thousands of people, and offer customer support nearly around the clock.
So a natural question comes up:
If so much is “free,” how do banks and credit unions stay profitable?
The short answer is this: banks make money in several different ways, mainly by lending money, charging fees, and selling financial services. Let’s break it all down in plain English.
1. Lending Money: The Core of Banking Profits
The biggest source of income for most banks and credit unions comes from lending.
How it works
When you deposit money into a bank whether it’s in a checking account, savings account, or CD you’re essentially letting the bank use that money. The bank then turns around and lends much of it to other customers.
For example:
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You deposit $5,000 into a savings account.
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The bank pays you a small amount of interest.
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That same money helps fund auto loans, mortgages, student loans, or credit cards.
The interest rate gap (also called the “spread”)
Banks pay low interest to depositors and charge higher interest to borrowers. The difference between those two rates is where much of their profit comes from.
Here’s a simple example:
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Savings account interest: 1%
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Auto loan interest: about 6%
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Credit card interest: often 15% or more
That gap between what the bank pays and what it earns is called the spread. Even after covering operating costs, it’s still a powerful income engine.
Credit cards are especially profitable because they carry some of the highest interest rates in consumer finance.
2. Investing Deposits (Within Regulations)
Banks don’t only lend money directly to customers. They also invest in a variety of assets, such as government bonds and other financial instruments.
Important note:
Banks are heavily regulated, especially when accounts are insured by the FDIC. These rules limit how risky banks can be with customer deposits. That said, banks still earn money by carefully managing investments alongside loans.
When interest rates rise, investment income often increases. When rates fall, profits can shrink. This is one reason bank earnings change from year to year.
3. Account Fees: Small Charges That Add Up
Even though many accounts are marketed as “free,” fees are still a meaningful source of revenue.
Common bank fees include:
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Monthly maintenance fees
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Overdraft fees
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ATM fees (especially using out-of-network machines)
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Fees for paper statements
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Inactivity fees
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Stop-payment fees
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Replacement debit or credit card fees
For example:
A checking account might charge $12 per month unless you keep a minimum balance or set up direct deposit. That’s $144 per year per customer.
Overdraft fees can be even more costly. A single overdraft might trigger a $30–$35 charge, even if the account is only overdrawn briefly.
4. Paid Financial Services
Banks also earn income by offering optional services to individuals and businesses.
Credit cards
Banks make money from:
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Interest on unpaid balances
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Annual card fees
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Transaction fees paid by merchants every time you swipe a card
This is why many stores prefer cash or debit cards they pay lower processing fees.
Checks and money orders
Cashier’s checks and money orders usually come with small fees, often between $5 and $10. While small individually, these charges add up across millions of customers.
Wealth management and financial advice
Some banks offer investment services through financial advisors. They earn money through:
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Advisory fees
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Commissions
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Asset-management fees based on account size
Business services
For businesses, banks provide:
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Payment processing
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ACH transfers
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Fraud-prevention tools
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Payroll services
Each service typically includes monthly or per-transaction fees.
Loan-related fees
Beyond interest, loans may include:
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Application fees
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Origination fees
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Late payment penalties
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Prepayment penalties (on some loans)
These fees boost bank revenue on top of interest income.
How Credit Unions Are Different
Credit unions look a lot like banks on the surface. They offer checking accounts, savings accounts, loans, credit cards, and online banking.
The key difference?
Credit unions are owned by their members, not outside shareholders.
What that means in practice:
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Credit unions are usually tax-exempt
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Profits are returned to members
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Rates on loans may be lower
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Savings rates may be higher
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Fees are often lower or fewer
Instead of maximizing profit, credit unions aim to serve their members. However, they still earn money using many of the same methods as banks.
What Happens to Credit Union Profits?
Any surplus a credit union earns is typically reinvested for members through:
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Better interest rates
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Reduced fees
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Improved services
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Stronger financial reserves
In short, members benefit directly when a credit union does well.
How Much Money Do Banks Make?
Bank profits can change quickly depending on:
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Interest rates
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Economic conditions
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Loan demand
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Market stability
For example, U.S. banks earned tens of billions of dollars in profit during strong economic periods, but earnings dropped sharply during times of uncertainty. Banking is profitable but not immune to economic cycles.
Please take a look at this as well:
Can You Send Money With a Credit Card? Pros, Cons, and Smarter Alternatives
