Quick answer
Banks make most of their money by paying depositors less interest than they charge borrowers; the IMF says that difference accounts for the bulk of banks' income in most countries. They also earn fees for services such as accounts, cards and payments[1]. Costs include interest, staff, technology and bad loans.
Key points
- The main income source is net interest income: interest earned on loans and investments minus interest paid on deposits.
- Net interest margin (NIM) expresses that income as a percentage of the bank's earning assets.
- Fees and commissions, such as card, account and payment fees, are the second big income source.
- Banks create new deposits when they lend, so they are not simply passing on savers' money.
- Profits depend on managing credit, liquidity and interest-rate risk, not just on charging more.
On this page
#What is the basic business of a bank?
The IMF describes the classic job of a bank in one line: banks take in funds, called deposits, from those with money, pool them, and lend them to those who need funds[1]. Deposits can usually be withdrawn at short notice, while loans such as mortgages last for years. Turning short-term deposits into long-term loans is called maturity transformation[1], and it is both the source of bank profits and the reason banks need careful regulation.
The basic money loop of a bank
- Savers — hold deposits
- Bank — pays a low rate
- Borrowers — pay a higher rate
- Spread — net interest income
#How does net interest income work?
Banks pay depositors less than they receive from borrowers, and the IMF says that difference accounts for the bulk of banks' income in most countries[1]. The difference in money terms is net interest income. Divide it by the assets that earn interest (loans plus bonds and other investments) and you get the net interest margin, or NIM, a common way to compare banks. Interest rates matter here: when rates change, the rates a bank earns and pays do not always move together, which can squeeze or widen its margin. If you want to understand how the rates you see are quoted, read APR vs APY explained.
Worked example
Worked example: a tiny bank's year
A made-up bank has 1,000 in deposits paying 2% a year. It lends 800 at 6% and holds 200 in bonds earning 4%. For simplicity it has no other funding. Then 2% of its loans go bad. All figures were computed with code.
- Interest earned: 800 × 6% + 200 × 4%
- 56
- Interest paid to depositors: 1,000 × 2%
- 20
- Net interest income
- 36
- Net interest margin: 36 ÷ 1,000 earning assets
- 3.6%
- Loan losses: 800 × 2%
- 16
- Left to pay staff, technology and taxes
- 20
Real margins are often thinner than in this simple example. For the large euro-area banks it supervises, the ECB reported an aggregate net interest margin of 1.54% in the second quarter of 2026, unchanged from the previous quarter[2]. Measures can differ between sources, so compare like with like.
#Do banks just lend out their savers' money?
Not quite. The Bank of England explains that the majority of money in the modern economy is created by commercial banks making loans, and that banks do not act simply as intermediaries lending out deposits that savers place with them[3]. The same Bank of England article explains that whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower's account[3]. So lending is not limited by a fixed pile of savings. The Bank of England says the amount of money created ultimately depends on the central bank's monetary policy, mainly through interest rates[3], and banks are also held back by rules such as capital requirements.
You may have heard that banks must keep a fixed share of deposits as reserves. In the United States, the Federal Reserve reduced reserve requirement ratios to zero percent effective 26 March 2020[4]. Banks still hold liquid assets and must meet capital and liquidity rules, but the old textbook reserve ratio is not what limits US lending today.
#What fees do banks charge?
The IMF notes that banks also earn fees for customer services such as checking accounts[1]. Common sources include account fees, overdraft and late-payment charges, foreign-exchange margins, wealth-management fees and payment fees. When you pay by debit card, your bank as the card issuer receives an interchange fee from the merchant's side. In the US, Regulation II caps that fee for large debit issuers at 21 cents plus 5 basis points of the transaction value[5], while issuers with less than $10 billion in assets are exempt[6]. See interchange and how card payments work.
| Item | Income or cost? | Example |
|---|---|---|
| Interest on loans and bonds | Income | Mortgage, car loan and credit card interest; interest on government bonds |
| Fees and commissions | Income | Account fees, card interchange, FX margins, advice fees |
| Interest paid on deposits | Cost | Interest on savings accounts and fixed-term deposits |
| Operating costs | Cost | Staff, branches, technology, compliance |
| Loan losses | Cost | Loans that borrowers do not repay |
Fee income matters alongside interest. The ECB said that in the second quarter of 2026 the higher profits of the banks it supervises were driven by higher operating income, with both net interest income and net fee and commission income up 8% year on year[2].
#What risks can wipe out a bank's profits?
The IMF lists the main dangers as credit, market and liquidity risks and overall solvency risk[1]. Credit risk is borrowers not repaying. Market risk includes changes in interest rates and bond prices. Liquidity risk is not having enough cash when depositors want it; in a run, depositors may withdraw so fast that the bank's small portion of liquid assets is quickly exhausted[1]. That is why banks must hold capital, a cushion of their own money to absorb losses, and why deposit insurance exists.
When a sound bank does run short of cash, it can borrow from its central bank against collateral. In the US this is the Federal Reserve's discount window, which lets depository institutions borrow from Federal Reserve Banks[7], explained in how the Fed's discount window works.
#How do neobanks and fintechs fit into this?
A licensed digital bank uses the same model: deposits, loans, fees and capital rules. A non-bank app usually cannot lend out customer balances, because e-money and payment firms must safeguard customer money rather than use it; see is a fintech app a bank. So they cannot earn a lending spread on those balances the way a bank can; some partner with licensed banks through banking as a service instead.
Common beginner mistakes about bank profits
Thinking banks only earn from fees
For most banks, the interest spread is the bulk of income[1].
Believing a bank lends out exactly what savers deposit
Most money is created when banks make loans; the amount is shaped by monetary policy and regulation[3].
Ignoring loan losses
A high margin can be wiped out if many borrowers default, as the worked example shows.
Assuming higher rates always help banks
Banks may have to pay savers more and can face losses on bonds they hold, so the effect depends on the balance sheet.
The bottom line
Banks earn mostly from the spread between lending and deposit rates, plus fees for services like cards and payments. Their profit is what remains after paying for staff, technology and loans that go bad, and it depends on managing credit, market and liquidity risk. Knowing this makes it easier to judge the real cost of a 'free' account.
Frequently asked questions
What is the main way banks make money?
Net interest income: charging borrowers more than they pay depositors. The IMF says this difference accounts for the bulk of banks' income in most countries[1].
What is a good net interest margin?
There is no single right number; it depends on the bank's business and the rate environment. For comparison, the ECB reported 1.54% for large euro-area banks in Q2 2026[2].
Do banks still have to keep reserves?
In the US, reserve requirement ratios have been zero since 26 March 2020[4], though banks must still meet capital and liquidity rules.
How does my bank make money from my debit card?
Mainly through interchange fees paid on the merchant's side when you pay. In the US these are capped for large issuers[5].
Sources
- Banks: At the Heart of the Matter (Back to Basics), by Jeanne Gobat — International Monetary Fund — Finance & Development Primary
- ECB publishes supervisory banking statistics on significant institutions for the second quarter of 2026 — European Central Bank — Banking Supervision, 2026 Primary
- Money creation in the modern economy (Quarterly Bulletin 2014 Q1) — Bank of England, 2014 Primary
- Reserve Requirements — Board of Governors of the Federal Reserve System Primary
- 12 CFR 235.3 — Reasonable and proportional interchange transaction fees — eCFR (US Code of Federal Regulations), 2026 Primary
- 12 CFR 235.5 — Exemptions (Regulation II) — eCFR (US Code of Federal Regulations), 2026 Primary
- The Discount Window and Discount Rate — Board of Governors of the Federal Reserve System, 2026 Primary
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