How do banks make money?

How do banks make money? We all use banks one way or the other. We step into these nice buildings with the marbled walls and modern furniture but rarely raise the question. Exploring this one question has altered our financial blueprint.

It's funny. As a software developer, I built banking solutions for the top 50 banks in the United States. But it wasn't until I read books like Becoming Your Own Banker by R. Nelson Nash and Bank On Yourself by Pamela Yellen that I realized consumers have been played by these institutions.

The secret to financial success has been under our nose the entire time.

What do banks want?

It is important to establish an understanding of what banks want. When you think about it, all banks generally operate in the same manner.

• What is it they want? - Your money.
• How often do they want your money? - They want your money on a regular basis. Look how easy it is to get direct deposit. And, have you ever noticed that you need identification if you want to make a withdrawal but not when you want to deposit money?
• How long do they want to keep your money? - Banks want your money for a long time. Have you ever been charged for withdrawing or transferring from your savings account too many times?

Banks advertise to buy your money by paying you interest. But, they don't just accept the deposit and let it sit for 30 years. They leverage your dollars and put them to work.

How do banks make money?

The example pictures below were taken from a real Bank from America.

• Money Goes In - Money goes in, preferably at a regular interval, like automatic deposits from your employer. The account holders, you and I, earn a small amount of interest. Let's say that it is a savings account that pays .30% interest (An ING savings account pays a lot higher interest).
  
  
  
  At this point, we are the lender and the bank is the borrower.
  
  
• Money Goes Out - Money is then loaned out at a higher interest. Let's say you get a car loan from the same bank and pay a 3.60% interest rate.
  
  
  
  Now the bank has changed places with us. They become the lender and you become the borrower. But you have to ask yourself: Whose money did I really borrow?
  
  
• Arbitrage - Not a lot of people realize this but you are paying the bank to borrow your own money. You earn .30% interest on your money so you can borrow it right back and pay them 3.60%. Or, in the discussion of assets vs liabilities, I gave them my asset to gain a liability.

Net Worth or Cashflow?

Does the bank care more about net worth or cashflow? They care about cashflow (money works for them in Cashflow Quadrant I). Banks want the money to continuously flow in so they can loan it back out at a higher rate. When you think "Pay off mortgage", your bank salivates.

It is all about control. Once you hand your money over to the bank, they control it as a resource. They use your money to make them money.

Banks can virtually turn your $1 into $10 or even $20 when extending loans. Now, you can't multiply (see the Rule of 72) your money, legally. But, you can velocitize your money like the banks do.

Be The Bank

There are a lot of financial mentors that you can follow like Robert Kiyosaki, Donald Trump, and Warren Buffett. I say your mentor should be the bank. Don't just learn to invest, figure out what banks are doing and implement the strategies in your own finances.

Now you can answer the question: How do banks make money? Learn to become your own banker by using the Infinite Banking Concept or Bank On Yourself strategies.

These are the secrets the financial institutions don't want you to find out.

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