The simple story: you deposit $1,000, the bank pays you 0.5% interest ($5/year), then lends it to someone else at 7% ($70/year), and keeps the $65 difference. Multiply by billions of dollars, and banks make massive profits. But if this were the whole story, every bank would be printing money, and none would ever fail. Reality is more complex—and more interesting.
The Four Revenue Streams
Banks make money through four main channels. Let's examine each using real data from major U.S. banks.
1. Net Interest Income (The Core Business)
This is the "borrow low, lend high" model everyone knows. But the devil is in the details.
How It Works:
Assets (What Banks Lend): Mortgages (4-7%), auto loans (5-10%), credit cards (15-25%), business loans (5-12%)
Net Interest Margin (NIM): The difference between what they earn and what they pay, typically 2-3.5%
Real Example: JPMorgan Chase (2023)
Interest Income: $105.6 billion Interest Expense: $48.0 billion Net Interest Income: $57.6 billion Net Interest Margin: 2.44%
On $3.7 trillion in assets, a 2.44% margin generates massive revenue. But that margin is razor-thin—small changes in interest rates dramatically affect profitability.
Key Insight: The Interest Rate Squeeze
When interest rates rise, banks' costs increase faster than their revenues. Why? Deposits can be withdrawn instantly, forcing banks to raise rates immediately. But loans are locked in for years at fixed rates. This is why banks struggled in 2022-2023 when the Fed rapidly raised rates.
2. Fee Income (The Hidden Cash Cow)
Banks charge fees for hundreds of services. Many of these fees have much higher profit margins than interest income.
Major Fee Categories:
Overdraft fees: $30-35 per overdraft, generating ~$8 billion annually industry-wide
ATM fees: $2-3 per out-of-network transaction
Wire transfer fees: $15-30 domestic, $40-50 international
Account maintenance fees: $5-15 per month if minimum balance not met
Credit card interchange fees: 1.5-3% of each transaction (paid by merchants)
Investment management fees: 0.5-2% of assets under management
Service charges: $7.1 billion Card income: $9.3 billion Investment/brokerage fees: $4.8 billion Total non-interest income: $41.4 billion
Fee income represented 42% of total revenue. Importantly, fee income has minimal capital requirements and near-zero marginal cost—it's almost pure profit.
3. Investment Banking & Trading (Big Banks Only)
Large banks make substantial money from investment banking activities and proprietary trading.
Revenue Sources:
Underwriting: Fees for helping companies issue stocks and bonds (typically 3-7% of issuance)
M&A Advisory: Fees for advising on mergers and acquisitions (1-2% of deal value)
Trading: Buying and selling securities, currencies, and derivatives for clients and for the bank's own account
Sales & Trading: Market-making activities and commission on trades
For investment banks, these activities can generate 70-80% of revenue. The profit margins are higher, but so is the risk and volatility.
4. Asset Management & Wealth Services
Managing other people's money generates steady, high-margin fees.
Revenue Sources:
Management fees: Percentage of assets under management (AUM)
Performance fees: Share of investment profits
Custody fees: Holding and administering securities
Trust services: Estate planning and trust management
This business is attractive because it's capital-light (doesn't require banks to lend their own money) and generates recurring revenue.
The Cost Side: Where the Money Goes
Understanding how banks make money is incomplete without understanding their costs. Revenue means nothing if expenses eat it all.
Major Cost Categories
1. Provision for Credit Losses (10-20% of revenue)
Not all loans get repaid. Banks must set aside money for expected losses. During recessions, these provisions spike dramatically.
Credit cards: 2-4% default rate typically, 6-10% in recessions
Mortgages: 0.5-1% default rate typically, 3-5% in crisis (2008: 11%)
Auto loans: 1-2% default rate
2. Operating Expenses (50-60% of revenue)
Employee compensation: Salaries, bonuses, benefits (largest single expense)
Technology: IT infrastructure, cybersecurity, digital banking platforms
Occupancy: Rent, utilities, branch operations
Marketing: Customer acquisition and retention
3. Regulatory Compliance & Capital Requirements
After 2008, regulations significantly increased costs:
Capital requirements: Banks must hold 10-13% of assets as capital (money they can't lend)
Stress testing: Regular examinations costing millions annually
Compliance staff: Armies of lawyers and compliance officers
FDIC insurance: Insurance premiums on deposits
Putting It All Together: A Real Bank's P&L
JPMorgan Chase 2023 Income Statement (Simplified)
Revenue
$161.2 billion
100%
Net Interest Income
$57.6 billion
36%
Non-Interest Income (Fees, Trading, etc.)
$103.6 billion
64%
Expenses
$112.1 billion
70%
Credit Loss Provision
$9.9 billion
6%
Operating Expenses
$102.2 billion
63%
Net Income
$49.1 billion
30%
The Surprising Truth
Most revenue (64%) comes from fees and other non-interest sources. The traditional "borrow low, lend high" model is actually the minority of the business for large banks. This is why banks push credit cards, wealth management, and transaction services so aggressively—the margins are better.
Why Banks Are Actually Fragile
Despite massive profits, banks operate on thin margins and high leverage. Here's why:
The Leverage Problem
Banks typically have $10-15 in assets for every $1 of capital. This 10-15x leverage amplifies both gains and losses. A 5% decline in asset value can wipe out 50-75% of capital. This is why small problems cascade into crises.
Three Fundamental Risks
Liquidity Risk: Banks borrow short (deposits can be withdrawn instantly) and lend long (30-year mortgages). If depositors panic and withdraw en masse, banks can fail even if solvent. This is what happened to Silicon Valley Bank (2023).
Credit Risk: If loans default faster than expected, banks lose money. During recessions, this can spiral quickly. If a bank is perceived as risky, it becomes risky (self-fulfilling prophecy).
Interest Rate Risk: When rates change rapidly, banks get squeezed. Their liabilities (deposits) reprice immediately, but assets (loans) are locked in at old rates.
The Bottom Line
What You Should Remember
Interest income is shrinking as a percentage of revenue for most banks—fees and services are the growth areas
Net interest margins are thin (2-3.5%), meaning small changes in rates have huge impacts
Banks make money on volume, not huge per-transaction profits—they need scale
Operating leverage is enormous—small revenue changes create large profit swings
Capital requirements limit growth—banks can't lend infinite money, they're constrained by regulations
The business model is inherently fragile—borrowing short and lending long creates structural vulnerability
Understanding how banks make money isn't just academic—it explains why they behave the way they do, why they're vulnerable to crises, and why they push certain products so hard. This foundation is essential for understanding broader financial systems, central banking, and economic policy.
Disclaimer: This article uses publicly available financial data from bank annual reports and SEC filings. Figures are approximate and for illustrative purposes. Banking regulations and practices vary by jurisdiction and change over time.