The 3-6-3 rule
To fully understand how banks within the US make money, you would like to know a touch about the history folks banking. Traditionally, banks made money by borrowing from depositors at low interest rates, lending that cash at higher interest rates to borrowers, and pocketing the difference. Banking wont to be heavily regulated, and therefore the joke was that it had been a 3-6-3 business; borrow money at 3%, lend it at 6%, and be at the golf links by 3 pm.
Most banks also charged a monthly fee to customers for maintaining a basic account. But, overall, service fees were low, constituting around 10% of total revenues.
How does the Banking system work?
The Impact of Deregulation
The wave of deregulation, beginning within the late 70s, changed this relationship. Main street companies discovered that they might borrow from the bond markets more cheaply than they might from banks, putting the “6” a part of the 3-6-3 model struggling .
And lots of latest consumer products like interest-bearing checking accounts, credit cards, market accounts, home equity loans, student loans, etc. became available. Banking became tons more complicated, so bankers couldn’t just head to the golf links at 3 pm anymore.
How does the Banking system work?
Two things ended up happening: banks realized that the larger they were, the more loans they might make. With deregulation, the large banks grew even bigger by acquiring smaller banks. Banks also realized that a simple thanks to make extra money was to easily charge consumers more fees.
How Banks Make Money
There are three main sources of revenue in retail banking today:
Net interest margin: this is often the difference, or “net”, between the interest paid to depositors and therefore the interest received from borrowers. At the instant (April 2020), the Fed’s low rate of interest policy means although depositors get almost no money for his or her savings, bank interest margins also are suffering as banks are unable to lend money out at a better rate thanks to the low rate of interest environment. Many large US banks are making margins around 3%, which, although on par with the three from the great old days of the 3-6-3 rule, constitutes much less revenue for banks as a results of deregulation and increased competition over the years.
Interchange: whenever you swipe a card at a store, the merchant pays alittle percentage of the cash to the bank that issued the cardboard , called an interchange fee. For credit cards this is often around 1.8%, while for debit cards it’s nearer to 0.3%. as long as Americans spend quite they save, it’s an enormous revenue stream for banks.
Fees: These are the fees that your bank charges you, including ATM fees, overdraft fees, late payment fees, penalty fees, etc.
How does the Banking system work?
Costs of Banking
There are tons of costs related to maintaining a bank. Maintaining security systems, marketing products, running ATM networks, and staffing call centers. How
