Banks are financial institutions that provide a number of financial services to individuals, companies and governments. These include deposits, investments, loans and financial transactions. Global banking assets are currently worth $180-190 trillion. The top 5 countries with the most banking assets are China, United States, Eurozone, Japan and United Kingdom. Biggest banks in the world by total assets include Industrial and Commercial Bank of China, China Construction Bank, Agricultural Bank of China, Bank of China, JP Morgan Chase, Mitsubishi UFJ, HSBC, Bank of America, BNP Paribas and Wells Fargo. Banking is one of the largest and most profitable industries globally. Want to know more about banks? Particularly about their revenue sources? Let’s have a look at the same.
What Are The Different Kinds of Banks?
1. Commercial banks offer checking/savings accounts, accept deposits and provide a number of other financial services like credit cards, debit cards, loans, mortgages, money transfers and more. Their services are categorised into retail banking for individuals and corporate banking for companies.
2. Investment banks help companies and governments in raising capital through multiple methods like IPO or bond issuance, provide advice on mergers and acquisition, perform trade underwriting and provide other related services. Such banks usually do not take retail deposits.
3. Universal banks combine the functions of both commercial and investment banks to provide financial services covered under both types of banking.
4. Cooperative banks or credit unions are owned by their customers, not shareholders. Profits are returned to the customers in the form of higher interest rates on deposits or lower fees.
5. Development banks provide long-term financial support for economic development across sectors like infrastructure, agriculture, exports and others.
6. Central banks control a country’s monetary policy, issue currency, manage reserves and act as a lender of last resort. They do not provide conventional banking services to the public or corporate entities.
How Do Banks Make Money?
1. Interest Income
Interest income is the primary revenue source for commercial banks. The classic model supporting interest income is borrow cheap, lend expensive. In this model, the money deposited by the bank’s customers play a crucial role. The depositors are compensated with a certain interest rate and security for their funds.
The bank lends out the deposited funds to borrowers in the form of personal loans, business loans, mortgages and other types of lending instruments. The interest rates on such loans are higher as compared to the interest rates on deposits, thereby creating a margin for the bank to make a profit.
Net Interest Margin determines the revenue earned from interest. It is the difference between interest earned on loans and interest paid to the depositors. More the NIM, greater is the bank’s profit. Banks tend to increase NIM by either charging higher interest rates on loans or reducing interest rates on deposits.
2. Investment Banking and Trading
Investment and Universal banks generate revenue from capital market services for corporations and investors. The services include in-house brokerage for executing trades like buying and selling securities, derivatives or foreign exchange, debt and equity underwriting services to assist corporations and other entities in raising debt and equity, and advisory services for mergers and acquisitions between companies.
These services are provided in lieu of fees paid by the clients. Income earned from capital market services is very volatile due to high fluctuations in the activities of capital markets.
3. Fees and Commissions
Fees and commissions make up a significant source of non-interest revenue for commercial banks. Banks charge fees and commissions for various types of services provided to the customers. They include account maintenance fees, checking accounts, savings accounts, ATM fees, credit card fees, investment management fees, custodian fees, minimum balance fees, late payment fees and mutual funds revenue. Furthermore, banks also earn revenue through commissions on sales of investment products, insurance and other financial instruments to its customers.
Revenue earned from fees and commissions is relatively stable and does not greatly fluctuate over a period of time. It is beneficial particularly during economic downturns when interest rates might be artificially low and the capital markets down.
4. Asset Management
Banks earn revenue from asset management services for multiple kinds of assets, including mutual funds, investment portfolios and pension funds. The banks charge a fee for managing these assets.
