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[–]United Statesplexluthor 3 points4 points ago

My general impression is that major banks give away all the useful stuff for free, and remain profitable either by

  1. some hidden mechanism I'm not aware of, or
  2. lending money out at a higher rate than they pay me for deposits, or
  3. screwing people over with fees.

If 1 exists, what is it? If it's just 2 or 3, I feel a little bad for taking advantage of the banks, since I put in as little money as possible (and keep most of it invested in brokerage accounts) and never pay fees myself, meaning poor or sloppy people are subsidizing my banking. Is that a legit concern? Are the banks offering services to me as a loss-leader or something, hoping that someday I screw-up and pay an overdraft fee or whatever? Or are they profitable even if all customers were like me?

[–]banco_magnifico[S] 11 points12 points ago

You're right on the money.

  1. There are a few hidden mechanisms, depending on the bank.

a. Swipe/interchange fees: Here's a very simple example - When you swipe your debit card at the store, the store owner pays 3% of the transaction to Visa or Mastercard. Visa or Mastercard keeps 2% and kicks the remaining 1% back to the bank.

b. Auxilliary services: Some banks have investment or insurance arms that will generate income from referrals or closed business by selling life insurance or annuities usually. (I don't do this)

c. Selling loans: When you apply for a mortgage at most banks, your loan is almost always sold to a third party, usually Fannie Mae, who then resells it again. That generates a straight one time commission, rather than an income stream, see point 2

  1. That's called the spread, and it's the most traditional way that banks make money. If a bank keeps your mortgage on it's books, this is where the spread is most commonly visible.

  2. I hate fees. There is so much wrong with the way some banks manipulate fees that it makes me sick sometimes. Many banks have even settled huge class action suits on issues like this. You can educate yourself though and find a bank that won't abuse consumers like some of the bigger ones do.

Regarding your use of your account - It costs a bank about $150 annually to maintain your checking account. This factors in everything from cost of funds to personnel. In a sense, you are a loss leader for the bank, but that's okay. They're hoping that you like them enough to come back to them when you need a mortgage and when you do, that loan more than covers their opportunity cost. Don't feel bad about it at all, and if you want to dig further, look up your bank's most recent 10-Q report to see how profitable they are. The line item you're looking for is ROA (Return on Assets.)

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    [–]banco_magnifico[S] 2 points3 points ago

    Banks can only be competitive to a certain point right now since rates are so low and spreads are so thin. There isn't much room for differentiation when you're talking about hundredths of a point, and it's extremely difficult to remain in business with rates that put your ROA close to zero. That's also why standalone mortgage companies exist. All they do is broker the deals and then sell the loans. Since they don't technically hold any money, they have fewer regulations to abide by and can often offer lower rates.

    [–]United Statesimnotminkus 1 point2 points ago

    If you have enough in their bank, they'll offer you investment options, which they make some money off of.

    [–]joejoe2213 1 point2 points ago

    I feel a little bad for taking advantage of the banks, since I [...] never pay fees myself, meaning poor or sloppy people are subsidizing my banking.

    Same principle behind credit card rewards (cash back, etc.) Those are subsidized by other credit card users who carry a balance or pay fees.

    [–]United Statesplexluthor 0 points1 point ago

    Yes, and I feel bad about that, too.

    Just to clarify, not bad enough to pay for banking services or stop using my rewards cards, but I do feel bad.