How Do Banks Make Money? Part 1

In 2017, banks made over 100 billion dollars just from credit card interest payments alone – essentially making this revenue by lending money to you and I. But this lending system is arguably making people poorer, while making banks richer, highlighting one of the pitfalls of our current financial system. In the 2nd-part series, we’ll talk about how banks make money and explore an alternative solution to our money system. One that empowers the masses, not just the banks.

How Banks Make Profit

Let’s assume you are a teacher and you made $1,000 in your last pay cheque. You deposit this amount straight into your savings account, refresh and confirm that the money is indeed in there. You’re feeling so good, like a thousand bucks so good.

What’s wrong with that?

Well, the bank doesn’t just keep this $1,000 in a private vault waiting for you to withdraw it whenever you need to. This would cost the bank money.

Instead, the bank takes the $1,000 that you deposited and they lend it out to other people. This ‘other’ group of people can use that (your) money to buy the things they need. Eventually, they pay the bank interest fees for using your money (making you a money-making machine).

Banks make more money when they have more in their hands to lend out (think credit cards, loans, lines of credit, etc.). And this works really well for banks – they’ve even taken it a step further.

Also Read: HINT: 6 Money Lessons You Need To Know

Playing the Game

Banks play a game called “Fractional Lending” which is basically the idea of making copies of the money you deposit.

In the “fractional lending game,” when you deposit $1,000 in the bank, the bank has the power to go to the magic scanner and turn $1,000 into another $10,000. Just like that, from nothing. As they see fit. When they see fit.

They take the money that you deposited and miraculously turn it into 5 or 10 times more in order to lend this extra money to other people that might need loans. Then, they make interest on every dollar that you deposited AND every dollar that they created from the magic scanner. In this way, banks are making revenue from two sources.

But this “game” is a game that only banks can play because if you and I try to print our own money, we’d go to jail. It’s these special powers that banks have, and the close relationships to government officials, that allow them to sustain the fractional lending model. But this comes with its own set of consequences.

Read Also: The Benefits of a Pawn Shop Over Getting a Loan

As Saifedean Ammous, author of “The Bitcoin Standard,” states:

“Having the ability to print money, literally and figuratively, increases the power of any government, and any government looks for anything that gives it more power.”

“Banking has evolved into a business that generates returns without risks to bankers and simultaneously creates risks without returns for everyone else.”

Next time, we’ll learn how people like you and I pay the price when banks operate under this model. And how it affects our entire economy and the fabric of our society. So stay tuned.

Meanwhile, click here to read the second part of how bank makes money.

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