How Do Commercial Banks Make Profits?

In order for any bank to survive without relying on liquidity measures like state intervention to salvage it, it must make profit from several sources. Commercial banks make their money from diverse schemes like investment, credit interest rates and the use of their own banking fees and for cards that they charge their customers.

By making a pool of the large capital base made up of cash deposits, a bank can be able to invest the money in the meantime in profitable schemes that have a financial implication in the bank and through advertising. Another most common standard of doing business by commercial banks is by charging interests on loans that can bring a large amount of profit ranging from a tenth of the amount lent to double the amount or more in certain long-term transactions. In special cases like loans that have a high risk value, especially those extended on an economically insecure basis, banks charge a high interest rate that will buffer the credit consequences in case of loss. In this manner a bank can make a high profit when external factors remain the same and the customer makes good his repayment.

Financial fees like those involved in opening of an account are some of the other means of making money for a bank. This is possible in a case where the commercial bank enjoys a large following which when other long term security measures are excluded has little effect on the custodial expenses that come with the deposit. Other charges include those contained in transfer fees and ATM fees for the city residents who have no access to the physical bank or are constrained by time to visit the real bank. Banks can also offer services of money transfer through cell phones by including service charges higher than normal rates in the telecommunication industry.


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