Quick answer: banks lend you money and they charge interest on it. And fees, lots of it.
For example, if you deposit $1,000, a bank pays you a small amount in interest to hold on to that money, then turns around and lends it out at a much higher percentage for a home loan. The difference between the interest you’re given and the interest on the home loan? Well, the bank gobbles that up as profit.
In this article, we’ll break down the less obvious ways banks make money – through their fees.
How Banks Make Money – The Truth
Fees, fees, and more fees. In 2023, banks made almost $6bn in overdraft fees alone – that’s about the same as the annual GDP of Montenegro. How does this work? Well, if you’re using a debit card and accidentally buy something for more money than you have in your checking account, you’d expect your bank to decline the charge. That’s not what actually happens.
They let the transaction go through, and then helpfully charge you around $30 for an overdraft fee. Even worse, banks can charge you multiple overdraft fees in one day, leading to horror stories of more than $100 in fees levied in a single day.
Overdraft Fees Quietly Steal Your Money
One overdraft fee wipes out your interest for the entire year and makes you hate your bank more than you already do (if that’s even possible). More than half the people I’ve spoken to during my personal finance talks have had at least one overdraft.
One night, I was out for dinner and my friend, let’s call her Elizabeth, and she started asking me questions about overdrafts. They got increasingly complex, which weirded me out because I wondered how she knew so much about them.
I asked her a simple question: how many overdrafts have you had? She got quiet, which of course made me want to interrogate her more. I learned that she’d incurred more than $400 in overdraft fees over four years of college by simply not paying attention to how much money she had in her account.
The sad thing is that she could have negotiated her way out of the first few fees and then set up a system so that it never happened again. There’s more on talking your way out of fees here.
Remember, your bank’s fees can be more important than the interest rate it offers: If you have $1,000 and another bank has a 1 percent higher interest rate, that’s only a difference of $10 per year. Just one overdraft fee equals three times that. Costs matter.
Don’t Get Me Started On The ‘Other’ Fees…
It’s not just overdrawing from your account which can cost you. Often, banks will apply seemingly arbitrary fees for something as simple as keeping your account open, or offering certain ‘benefits’. There’s nothing that grinds my gears like seeing a bank charging an ‘admin fee’, sometimes upwards of $100, for opening a checking account.
You’re probably wondering where that fee goes. To be honest, so am I; rest assured banks aren’t hit with some sort of charge for opening accounts that your admin fee covers. Quite the opposite – it’s a cost there solely to increase the profit banks make over the lifecycle of your account.
They also lure you in with credit card ‘bonuses’. You might’ve seen in the past a long list of bonuses you get for opening a credit account, all for the low, low, price of $50/month. Have you ever actually gone through those benefits and seen how many you use? The 10% discount you get at Home Depot is useless if you don’t like DIY.
Properly grilling these not-so-hidden fees when opening an account is crucial. Things might look great on the surface, and then you find a year later you’re $200 down for no obvious reason. Take a look at Bridgette’s example:
Bank of America institutes new fees for what seems to be no reason, sometimes unexpectedly. Like a $5 maintenance fee on savings accounts? It’s not like the interest offered is even worth it. Not to mention their $12 fee for checking accounts that don’t have deposits of $250 or more. I know the amounts seem small but I know for some people $5 to $12 is a lot of money and can be the difference in paying bills. It always seems like those with the lowest balances end up paying the price.
BRIDGETTE SALLEY, 26
The $5 and $12 Bridgette mentions add up over time, and quickly overwrite any interest payments which the bank offers. Having money shouldn’t be costing you money — let’s take a look at some of the worst offenders.
The Two Worst Banks In America
I absolutely hate when sophisticated financial firms take advantage of people who don’t understand the complexity of these financial products. It genuinely infuriates me.
Despite this, people still stick with banks that have proven patterns of bad behavior — two of the worst I’ve come across are Wells Fargo and Bank of America. So, I asked some of my readers who bank with them — what’s stopped you from switching?
I’ve been with Wells Fargo for like 20 years . . . so it’s just one of those things where it’s always been that way and I don’t think about it.
I have 8 accounts with WF, and although I hate them and what they stand for, the idea of moving those accounts seems like a gigantic, annoying time suck.
I’ve changed banks before, but it was a struggle to get the ball rolling. It’s almost like an emotional attachment.
Yep, those are the reasons people gave for sticking it out with their bad banks. It’s a pain to switch and I’ve been with them for a long time. Silly, right?
It often boils down to having a loyalty to a company which — believe me — has no loyalty to you. So sure, Stay with the bank that’s going to open fake accounts under your name, charge you near-extortionate fees, and figure out a way to screw you today or five years from now.
I’ve discussed both Wells Fargo and Bank of America previously, and gone into detail on why they’re so bad for their customers. If you bank with either of them, you’ll want to watch this video — it might prompt you to reconsider:
So, What’s Stopping You From Switching Banks?
So let’s say that’s persuaded you to change banks; the next obvious question is where you should move to. One of my preferred banking options for customers is Schwab; I’m not going to go into the ins and outs of why I love them here, but here’s some quotes from the people who were smart enough to switch to them:
I switched to Schwab YEARS ago based on your recommendation and haven’t looked back.
RAIHAN ANWAR, 29
I’ve been with Schwab for years thanks to your recommendation. Service is always great, and the few problems I’ve had are always cleared up.
RICK MCCLELLAND, 27
On your recommendation, I moved to Schwab. I’ve used them all over the world (including in Pakistan at what claims to be the world’s highest ATM).
SAAD GUL, 42
With such glowing feedback it’s hard to see why somebody wouldn’t be rushing to change their bank. Well, let’s look back at the reasons people gave for not switching, and through that see what their invisible money scripts are:
| Invisible Money Script | What it Means |
|---|---|
|
It’s a headache to switch banks. |
Honestly, I get it. You’ve got your account set up and it works. Why not just stay? My analysis: You don’t have to switch, but if you spend about one day doing it, you’ll ensure that the foundation of your financial system is solid. The banks I recommend are more convenient, cheaper, and offer better rewards than Big Banks. As you grow your income, you’ll know you’re working with the best. |
|
I don’t know where else I would go. |
Schwab, there. |
|
This was my first bank ever. |
I’ve only heard this once, but it was so ridiculous I had to include it. Do you have a lifelong love of your first thumbtack? What about your first garden hose? No? So why are we talking about how you cuddle up with your first bank ever? It made me laugh. |
Ask yourself why you’re holding onto your current bank. Can you see any of these scripts? You might have ones that aren’t listed as well. Just make sure that if you’re making a decision on something as important as where you hold your money, know WHY you’re doing it.
Switching Banks is Worth Your Time
If you’ve learned one thing today, I hope it’s that banks profit from you. Their biggest tools for making money are by spending yours, and charging fees when you spend yours. Hardly seems fair, does it? Yet, if you look back through the examples in this article you’ll see how easy it is to find a bank which works with you, not against you.
By making sure you don’t fall victim to unnecessary fees, you’re putting yourself in a financially stronger position, protecting yourself from banks who’d take your money in a heartbeat. It’s just one of the ways you can set yourself on a course to successfully manage your personal finances.
Learn other ways to take complete control of your finances, avoid getting charged unnecessary fees, and spend your money GUILT-FREE with our free Ultimate Guide To Personal Finance below:
