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How Do Banks Make Money?

.Have you ever wondered how banks make money?

Banks make money from their retail customers, as well as from merchants: department stores, retail
outlets, restaurants, bars, and etc.

There are three big ways in which banks make money: net interest margin, interchange, and fees.

Net Interest Margin

Customers make deposits into banks and the banks typically use most of those deposits to provide loans
for other customers. These loans have interest rates tied to them that customers need to pay in order to
get the loan in the first place.

This means that the money earned on these loans is revenue for the bank, and some of that earned
money is given back to customers in the form of interest within checking and savings accounts. The
money that the bank keeps is considered the net interest margin: the difference between how much the
bank earns on their loans versus what they payback to customers is their net interest margin.

Interchange

Whenever you use a credit or debit card to buy something at a store, that store usually has to pay what ’s
called an interchange fee. Most of the interchange fee goes to your bank, and some goes to the store ’s
bank. This interchange fee covers the cost of handling credit and debit transactions.Interchange fee
rates are set by credit card companies.

Among other factors, interchange fee rates can vary by provider, but the way in which they are
structured is that it’s a percentage of the transactions plus a flat rate.

Fees

Most people are familiar with banking fees. Banks find ways in which to charge their customers all sorts
of fees. With many traditional banks, your checking or savings account agreement will have a long
section listing out all the ways in which they charge you fees and penalties.

Some common fees and penalties include: monthly service fees, minimum deposit limits, withdrawal
penalties, ATM fees, overdraft fees, and foreign transaction fees.

Banks can typically make money in three ways: net interest margin, interchange fees, and banking fees.
Traditional banks, credit unions, and online banks make money in utilizing all or a combination of the
three methods.By better understanding how banks make money, you might find yourself learning how
to look out for fees and understand if banks are truly working in your best interest.

HOW TO MEASURE BANKS PERFORMANCE

Let's define first what is financial performance

According to ResearchGate, financial performance is the achievement of the company's financial

performance for a certain period covering the collection and allocation of finance measured by capital
adequacy, liquidity, solvency, efficiency, leverage and profitability. Financial performance, the
company's ability to manage and control its own resources. Cash flow, balance sheet, profit-loss, capital
change can be the basis of information for corporate managers to make decisions.

PERFORMANCE MANAGEMENT SYSTEM PRACTICES IN BANKING SECTOR

Performance Management system would be instrumental in its efforts to create a customer-focused

culture. Performance management system practices help to drive focus and clarity in an organization by
linking individual performance to organizational goals and values. It also creates a high-involvement
environment by placing responsibility for performance on each and every individual. PMS helps in
assigning target, tracking their performance, developing their skills and gives the employees, the
balanced evaluation and helps them to receive rewards.

This system has become essential in banking industry, because in banks strive in to manage risk,
enhance its operations, design and execute more suitable promotional activities and attrack and retain
more customers to join with them.

What are Key Performance Indicators (KPI) for Banks?

.Using Key Performance indicators you can identify the factors that increase or shrink profits and then
make strategic decisions about those factors. Over time, you can use KPIs to evaluate your bank ’s
success and quantify performance.

Here are some examples of bank key performance indicators.

Total Deposits Per Branch

Banking Efficiency Ratio

Operating Expenses as a Percentage of Assets

Revenue per Registered Financial Representative

New Accounts Opened per Branch

1.: Total Deposits Per Branch

Total deposits per branch gives you a baseline of overall branch performance. Once you determine the
baseline, you can analyze the performance of individual branches. You may decide to close branches
with too few deposits, relocate branches to more deposit-rich areas, or improve branch employee
training to increase the deposits-to-branch ratio.

To calculate, divide the total dollar amount of assets the bank manages by the number of retail
branches.

2.Banking Efficiency Ratio

This metric compares expenses (or operating costs) to interest and non-interest income and is an easy
way to measure your bank’s ability to turn assets into revenue. If the efficiency ratio increases, the bank
is either incurring increased operating costs or decreasing revenues.

To calculate efficiency ratio, divide non-interest expenses by total revenue (interest and non-interest
income), as a percentage.

3. Operating Expenses as a Percentage of Assets

A large bank with billions of dollars in deposits is not automatically better managed than a smaller
community bank. The ratio of expenses to assets is a better indicator of financial health. Bank assets
include cash, interest-earning loans, and government securities like Treasury bills, Treasury bonds, and
municipal bonds. Examples of operating expenses include employee salaries and benefits, building and
information technology costs, legal fees, consulting services, and directors fees.

To calculate, divide operating expenses by the total dollar amount of assets, as a percentage.

4.Revenue per Registered Financial Representative

Banks collect both fee and investment revenues from the sale of stocks, bonds, options, mutual funds,
and annuities. Representatives typically work on salary plus commission. This metric is a general gauge
of bank profitability and commission fee pipeline.

To calculate, divide total fee and investment revenue by the number of registered financial
representatives.

5. New Accounts Opened per Branch

Just like in real estate, placement matters.Measuring the number of new accounts opened per branches
is just one important way to track overall branch performance.

To calculate, divide the total number of new deposit accounts by the number of branches.
Benefits of measuring Key Performance Indicators in your bank’s business intelligence efforts include :

1.Improved productivity and performance management of banking staff

.Example: . Chase Streamlines Transactions with Kiosks and Express Branches

Instead of customers waiting in line to talk with human tellers at bank branches, Chase Bank uses
automation. The bank has installed self-serve teller kiosks in many of its branches so that customers can
quickly help themselves. Chase also recently introduced “Express Branches,” which feature kiosks and an
advice bar for digital products or new accounts. The smaller branches make it easier for customers to
get the help they need without waiting in line

2.Increased customer acquisition and retention

Retaining customers is all about delivering the best in customer service.Offering VIP programs can feel
exclusive and will help retain customers.

One example of a successful loyalty program is the ThankYou program offered by Citibank. It allows
customers to earn points based on their banking activities with Citibank and its partners.These points
can be redeemed for various rewards and products. Implementing some form of customer loyalty
program is a great way appreciate and incentivize your customers by rewarding them when they use
your bank’s service

3.Improved customer experience and cross selling

One way to improve customer experience is to solicit customer feedback whenever possible.Example:
.Capital One bank customers can take advantage of Eno, a text-based chatbot to help with all their
financial needs. Learns more about each customer’s behavior and feedback with every interaction and
can adapt to meet their needs and preferences. A simple text command can show customers their
balance and recent account activity and help them pay bills. The bot even understands emojis for a truly
human-like communication experience.

4.Reduced amount of banking operations cost

Example: .BMO Harris Bank recently opened a “Smart Branch” to combine the best features of
interactive technology and human advice. The branch includes video tellers that interact with customers
through screens, Smart ATMs and on-demand video to showcase products and advice. Bankers also
have tablets to help customers with their accounts and online access. Mobile banking as a reason for
reducing banking staff. Online banking channel help to reduce the cost of both banks and customers.