How Do Banks Make Money? And Can It Be Done Ethically?

10 and one 10 us dollar bill

Banks are an essential part of our daily lives. They keep our money safe, give us access to loans, and allow us to buy things we want with the swipe of a card.

It can feel like banks are doing us a great service, and they are. But, banks aren’t doing any of this for free. They make profits off our deposits by repurposing our money into other financial products, such as loans.

In this article, we explore how banks make money and whether they do it ethically. Analyzing the financial sector is a favorite pastime of ours here at Aspiration, so we’re excited to share our findings with you. 

How do banks make money?

We entrust banks with our money. So, how do they stay profitable while keeping our money safe?

The answer, quite simply, lies in the fees they charge for their products and services. Interest rates, fees, and in-house brokerage services are three ways banks make money off their customers.  

Interest rates

Whenever you put your money in a savings account, the bank offers you an annual percentage yield (APY). This rate helps you earn an amount of money from your savings deposit each year. 

Over time, the money you receive from the APY, plus the principal deposit in your account, grow steadily to produce an effect known as compound interest. 

When banks give out loans, they apply the same interest rate concept to them. You get a loan but you have to pay a monthly interest rate on it until you pay it all back. This lending service helps banks make large amounts of money, especially on high-interest rate loans such as student loans, mortgages, and credit cards. 

Fees

Other than loans, banks charge fees for their services.

While you might earn a decent APY on your savings account, some banks may still charge you account fees for ‘account maintenance’ purposes. 

They may also charge interchange fees whenever you buy something at a store using your debit or credit card. The store has to pay an interchange fee for the transaction. A large percentage of the fee will go to your bank, and the remainder will go to the store’s bank. 

And, if you’ve tried taking out cash at an ATM that doesn’t belong to your bank’s network, you may have paid an ATM withdrawal fee

This report suggests that in 2015 banks made an average of $34.6 billion in fee income. It doesn’t look like banks will be going out of business anytime soon. 

In-house brokerage services

Banks also make money from in-house brokerage services. These include sales and trading services for investments in stock as well as wealth management services.

Customers who want to invest in mutual funds or individual stocks can contact their bank for financial advice. A financial planner from the bank will help them select the right investment portfolio suited to their risk preference. And, of course, the bank will charge a nice fee for the brokerage service.

In-house brokerage services are also available to customers who want help with retirement and real estate planning. Big banks offer financial advice on what to do because they understand market trends and opportunities. Wealth management is so profitable that some large banks rely on it for nearly 50% of their revenue. 

What are some popular businesses that banks love investing in?

Banks are profit-seeking businesses. They love working with businesses that generate colossal amounts of revenue. Unsurprisingly, some of the world’s most profitable companies aren’t really the world’s most responsible. 

Here’s a look at the industries that banks love investing in.

Pharmaceuticals

Pharmaceutical companies are so big that they buy food and agriculture companies to beef up their portfolio. Just in 2019 alone, the world’s largest pharmaceutical companies made a combined revenue of $392.5 billion

The high returns make pharmaceuticals an enticing investment asset for banks. Banks around the world make loans to pharmaceutical companies in the hopes that they’ll reap huge profits. Most of the time this strategy works, but there have been some bitter moments, as evidenced by the experiences of these banks in India

Real estate

The 2008-2009 Great Recession exposed us to the dirty world of mortgages. Banks love mortgages because they provide steady revenue that adds to their profits. 

Even when homeowners are struggling to pay their mortgages, banks continue to give out real estate loans to shore up their balance sheets. 

It’s not surprising when you look at this whole dynamic from a distance. People want to buy homes for their families and banks want to make it as ‘easy’ as possible, by giving out long-term loans that can be paid back monthly. It’s a win-win situation, but only when things are managed responsibly. 

Oil companies

Unbeknownst to most of us, banks have been quietly lending money to fossil fuel companies. Oil, natural gas, and coal are all considered to be some of the most valuable and profitable resources on the planet, simply because they provide about 80% of the world’s energy

Large US banks love lending to oil companies because they believe they’ll get crazy profits. 

For example, between 2016 and 2020, JPMorgan Chase lent $196 billion to fossil fuel companies. Other banks like Citi, Wells Fargo, and Bank of America are also complicit in this unethical lending racket.

Can banks make money ethically?

If the world’s largest banks have no qualms about lending to oil companies and big pharmaceuticals, can banking ever be done ethically?

The answer is yes. Many banks today offer financial products and services that adhere to a strict set of ethical regulations. 

They are socially responsible banks that seek to make money by focusing on the triple bottom line. Profits are examined against a bank’s social, environmental, and economic impact. 

These banks work hard to ensure that their customers’ money doesn’t finance any harmful industries such as fossil fuels, tobacco, weapons, private prisons, and logging.

The money is invested instead in sustainable businesses and clean energy technologies. Most socially responsible banks, like Aspiration, have B Corp certifications that verify their commitment to do good for the community and the planet. 

They give loans to underserved community members who have been long ignored by big banks and help small, minority-owned businesses secure capital to hire workers and expand their operations.

What also sets these ethical banks apart from their bigger counterparts is their commitment to transparency. Ethical banks declare their investments so customers can see how their money is being used. Interest rates and bank fees are shown upfront to help customers choose the right services and products that they need.  

Ethical banks make money from interest rates, fees, and in-house brokerage services, just like big banks do. But, it’s their conscious effort to make a positive impact that makes them a force for good. With an ethical bank, you can trust that it’ll operate to the same values that you care about

How do the world’s 3 most ethical banks make money? 

Aspiration, Triodos Bank, and Amalgamated Bank are the world’s three most ethical banks. Their financial products and services are profitable yet ethical because they capitalize on social responsibility. Here’s a detailed look at how each of these banks makes money.

Aspiration

Aspiration is an ethical neobank that offers one of the highest APY interest rates in the market. Customers can receive up to 1.00% APY on their savings plus 10% cashback on purchases from Aspiration’s Conscience Coalition partners, which include TOMS, Warby Parker, and Blue Apron. 

Aspiration makes money from its Aspiration Plus savings account, which offers the perks above and starts at $12.50/month in fees. It also offers investments in its Redwood Fund. This fund only invests in fossil-fuel-free sustainable businesses that care about the planet and its people. 

Aspiration doesn’t charge any hidden fees, so rest assured that any money you save with them will be managed ethically. 

Triodos Bank

Based in the Netherlands, Triodos Bank is a leading European ethical bank that’s on a mission to make money benefit people and the environment. They are fully transparent about their operations, publishing everything from the loans they make to the carbon footprint of their loans and investments. 

Savers can open savings accounts and personal checking accounts, as well as business accounts with Triodos. Triodos makes money from the interest rates on its business loans, which are screened to ensure that the money being given does not end up doing any harm to humans, animals, and the environment. 

Triodos offers sustainable mortgages as well as loans to non-profit organizations. 

Amalgamated Bank

Amalgamated Bank is America’s largest B Corporation certified bank. They have provided loans and financial services to thousands of families, non-profits, businesses, and organizations since 1923.

Amalgamated offers products that are mission-driven, such as a mortgage program for first-time homebuyers with adjustable interest rates and low down payments. 

They also provide investment and retirement services to help customers invest in carbon-neutral, environmentally friendly mutual funds. 

With a mission to create a more just and compassionate planet, Amalgamated aims to make sustainable banking available to anyone.

Are ethical banks the future of financing?

There’s no doubt that most of our financial situations are engaged in unethical practices. From lending to fossil fuel companies to charging unfair rates on credit cards and mortgages, large banks are profiting off our personal savings.

So, could ethical banks be the alternative?

It’s a question that’s worth some serious consideration. The expansion of the fossil fuel industry, aided in large part by financing from large banks, will make us miss our greenhouse gas reduction targets. 

Rising debt and homeowners’ inability to pay their mortgages could lead to another financial crisis. 

Ethical banks offer solutions to these problems. Their socially responsible practice of investing only in carbon-neutral businesses and initiatives ensures that not all of our money is being diverted to fossil fuel companies. Their commitment to fair financial products and services means that everyone has a chance of building wealth and not just debt.

Despite these positive attributes, ethical banks do have their own flaws. Most have fewer financial products and services compared to large banks. Many are local to a geographic region or internet-based, limiting their reach to customers.

But, with more customer interest, ethical banks can overcome these disadvantages. They offer the best version of banking that we know of. This must not be ignored because our complacency toward the financial sector will only see us repeat the same financial disasters of the past. 

As the Global Alliance for Banking on Values puts it nicely, ethical banks ‘focus on real human needs in the real human economy’. Our climate-change future needs the social responsibility that only ethical banks can provide.

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