For retail banking, there are currently three primary sources of income:
Net interest margin: this is the difference, or “net”, between the interest paid to depositors and the interest received from borrowers. At the moment, the low interest rate policy means that depositors get almost no money for their savings, and bank margins are huge. Many large banks are making margins over 5%, which are even higher in the mass market for unsecured loans.
Interchange: Every time a customer swipes a card at a store, the merchant pays a small percentage of the money to the bank that issued the card, called an interchange fee. For credit cards this is around 1.7%, while for debit cards it is nearer to 1.1%. Because consumers usually spend more than they save, this is an immense stream of revenue for banks
Fees: These are the fees that the bank charges the customers, including ATM fees, overdraft fees, late payment fees, penalty fees, etc. The average household in the US ends up paying over $ 250 in overdraft and bounced cheque fees alone. Along with interchange, these fees add up to more than 50% of revenue for large banks in the US.
It is important to understand that all the revenue that accrues to a bank is actually a cost to the customer. Some of this may be clear if it is a charge that appears in the monthly statement. Banks pass on their costs to consumers in the form of fees and charges. Customers in turn forego higher income from other sources as they keep their money in checking [RL|L1] [S2] accounts and deposits.
This equation of income and cost is a perpetually moving target for banks and is usually the core of retail banking operations.
[RL|L1]I notice this uses checking rather than current accounts which is more common – is this correct? I’ve left “current or checking accounts” in some places.
[S2]Both are correct – In Asia it is common to refer to it as current account. In US, it is called checking.