How Do Commercial Banks Make Money?

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How Do Commercial Banks Make Money?
How Do Commercial Banks Make Money?

Video: How Do Commercial Banks Make Money?

Video: How Do Commercial Banks Make Money?
Video: How do commercial banks make a profit? 2024, March
Anonim

How commercial banks make money - sooner or later everyone who uses their services asks this question. It is important for bank customers to know how the safety of their deposits is ensured, which is a guarantee that the interest on their loans will not increase many times after they are issued.

How do commercial banks make money?
How do commercial banks make money?

Commercial banks, like state banks, are financial institutions, the main purpose of which is to make a profit. What banks make money on is difficult to understand for a common man in the street. But, at the same time, it is the clients of banks who help them earn money - by taking loans, making deposits, using other services of these financial organizations.

Loans and deposits are the main source of the bank's income

Before starting to provide lending services, the bank needs to collect a certain capital, the amount of funds. That is, the basis for the functioning of such an organization of a commercial or state type is the deposits of citizens or legal entities. The bank can attract and increase capital in the following ways:

  • offer the accrual of higher interest on deposits (deposits) than competitors,
  • invest available funds in profitable projects - become a shareholder in a high-yield business, buy shares in a steadily developing production,
  • expand the range of additional banking and financial services, offer clients the most comfortable conditions for cooperation,
  • have an impressive start-up capital that allows you to give a guarantee of the safety of deposits.

After a sufficient reserve for lending has been collected, the bank has the right to offer this service to its customers. Loans are often the main source of income for small commercial banks. The wider the offer - consumer loans, car loans, mortgages, agricultural loans - the more clients the bank has, and the higher the income.

Additional services as a source of income for a commercial bank

What else commercial banks make money on is a number of additional services that they provide to their customers. Their list includes:

  • information, marketing, analytical and mediation services,
  • consulting and legal assistance in controversial and difficult situations,
  • maintaining cash, accounting and general financial accounting for large and small client enterprises,
  • cash services, delivery of funds for announcing and issuing wages, collection,
  • provision of post office boxes and bank cells for the exchange of documents and storage of valuables,
  • ensuring the functionality of banking educational institutions, training specialists,
  • assistance in obtaining patents, notary services, payment for services provided by third parties - utility bills, telephony, cellular communications and others.

Additional banking services, as a source of income, generate more than one third of all commercial banks' profits. But they are the ones that attract most of the clients, expand the partner base, and attract investors.

Clients of commercial banks should understand that the wide range of opportunities they provide and the high income of a financial institution are the guarantors of their stability.

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