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Understanding How Banks Make Their Profit

Banks make millions in profit every year, and you ever wonder how they succeed in doing so? Well, these financial institutions have financial experts whose work is to strategize on how they will make bigger profits. For them, business is not usual until they outshine their competitors with ideas to attract a high traffic to the bank and get more money from them. So, what are these various ways banks make such huge profits?

Different ways how banks make profit

Service fee

visa card illustration Every time a person opens an account, there are various charges one must pay to for maintaining the account. Some charge a monthly fee, while other charge depending on transactions. Also, this fee varies depending on the type of account. However, services like ATM or over the counter withdrawal, salary processing, and statement preparations just to mention but a few, will all have a fee. Banks make a lot of money from this depending on the number of customers they have. No wonder! Banks keep on encouraging people to open accounts with them.

Interest rates on loans

There is no bank loan without an interest rate. Most of them are regulated by the state where the country’s main national bank provides the capping limits. Banks are nowadays going out looking for borrowers so that they can make money through this method. All banks have a loan department which vigorous markets the loans they have. As a matter of fact, this is the second biggest revenue generation option banks have.

Interchange fee

Do you wonder what is interchange? Most people do but if you own a credit card, then you help banks earn money through the interchange. When different banks process the credit card payment, they earn some fee from the merchant with the credit card bank earning more. It still gives banks a reasonable amount of profit at the end of the year particularly now that more people prefer to use a credit card.


coins and clock Ever heard of investment banks? Most of them engage in various investment activities to look for more finances. They can trade in securities and engage in real estate among many other investment opportunities. Their investment advisers make very sensitive probabilities as they do not want to risk people’s money. However, most of them make smart ideas and remain profitable out of which their customers benefit in dividends

The above sources of profits for banks are just but a few examples. Banks are ever looking for profitable ventures to try out.

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Beginner’s Guide To The Lending Club

Lending club decides whether the credit of the borrower is right on the credit report, credit score, the requested loan amount and the debt to earnings ratio of the borrower. Then credits are assigned to the borrower and given a credit grade, interest rate, and fees. The loans can be paid back with no penalty at any point. The usual loan period is three years. A five-year period is available too at higher interest and costs.

Understanding how lending clubs work

How lending club functions

Investors search the loan lists on the company website and see whether there are any loans in which they’d wish to invest in are available. You can read an in depth Lending Club review here. If anything looks attractive, the investor can decide how much they would like to invest.


Stockholders Earnings

Stockholders will earn cash from the interest rates on the loans. The prices run from 6.03% up to 27.48%. The lousier the creditworthiness, the higher the rate of interest will be. Lending Club promises to pay the note holder any money received from the borrower. There’s a risk to the bank that Lending Club could go bankrupt. The bank can also put a note up for sale before the maturity of the note.

Benefits to borrowers

For borrowers, the system is touted as giving access to credit at a cheaper IR. Statistics are cited utilizing the 6.78% rate of interest as a comparison to understand bank interest rates for the same loan of up to 9.06% as a state average. For the financier, a higher return on the money invested is suggested that 93% of investors earned between 6% and 18%, miles away better than CD rates of 1% and less. Lending Club protects the secrecy of the financier and promotes the transparency that exists between the company, Lending Club, and the financier.

Growth of lending club

Lending Club is the world’s largest P2P platform for lending. Since its founding in 2007, it has turned heads and received positive reviews for its efficiency and results. By employing technology to match banks (investors) and borrowers, a lower cost system is available and is passed along.

By focusing on prime borrowers, Lending Club has achieved a default rate of only 4%. Lending Club review is growing by powerful jumps. In December of 2012 the company went past $1 bill in loans. Institutional money is taking interest as one or two bigger investors have invested right into the enterprise.



This model certainly is not going away shortly and will definitely be emulated by others. It has still to be seen how widely the peer-to-peer concept will grow. Lending Club may continue to pave the way.