How do banks make money on Savings Accounts?

You’ve all seen the adds for the “no fee” savings accounts being offered at various institutions. Have you ever wondered how the banks make money on those accounts? To really simplify it, it is basically as follows: When you deposit your money into a savings account, you agree to be paid interest from the bank, which for the purpose of this post we will say is 4%. Now the bank will take that money and turn around and give it to someone in the form of a mortgage so they can buy a house and charge them 6%. So the bank COLLECTS 6% from mortgage holders and PAYS 4% to savings account holders. The difference between the 6% and the 4% is known as “the spread”.

Of course it is not so cut and dry in that a bank can’t take $1 million in savings accounts deposits and then just go out and give $1 million in mortgages.  What happens when people need to access their savings? The banks have certain ratios they abide to with respect to how much they lend out as a proportion of the deposits they receive.

And of course the more traditional “bricks and mortar” banks also tack on monthly fees to your accounts – which REALLY ADD UP.  Remember: If you are continually amazed by how much profits banks are churning out, you can complain or you can buy their stock! :)

Preet Banerjee
Preet Banerjee an independent consultant to the financial services industry and a personal finance commentator. You can learn more about Preet at his personal website and you can click here to follow him on Twitter.
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