How banks make money

A retail bank is, financially, a leveraged portfolio of loans and securities funded by deposits and other borrowings. Its revenue comes from two places: the interest earned on the asset side of the balance sheet minus the interest paid on the funding side (net interest income), and the fees charged to customers and to merchants who accept its cards (non-interest income). The mix is heavily tilted toward the first line; for most U.S. banks, net interest income is two-thirds or more of total revenue.

This article walks through the income statement of a typical U.S. retail bank. The figures and ratios that follow are based on the FDIC's aggregate Quarterly Banking Profile and on the Y-9C call reports filed by bank holding companies; specific percentages vary across institutions and across the rate cycle, and readers should treat the numbers as illustrative rather than as a forecast.

Net interest income: the largest piece

Net interest income is the difference between the interest a bank earns on assets — loans, securities, and balances at the Federal Reserve — and the interest it pays on funding — deposits, federal-funds borrowings, repurchase agreements, and longer-dated debt. Expressed as a ratio of average earning assets, it is the net interest margin, or NIM. For U.S. commercial banks in aggregate, NIM has historically sat between roughly 3.0% and 3.5%, drifting with the level and shape of the interest-rate curve.

On the asset side, the largest holdings at a typical retail bank are residential mortgages and mortgage-backed securities, commercial and industrial loans, commercial real estate loans, and U.S. Treasury and agency securities held in the bank's investment portfolio. Credit-card receivables are a smaller share of assets but a much larger share of interest income because card balances carry rates that are several multiples of mortgage rates. At a card-heavy issuer, credit-card net interest income can dominate the income statement.

On the funding side, the largest single liability at most retail banks is consumer and small-business deposits. Deposits are the cheapest form of funding a bank can have, in part because of federal deposit insurance: insured depositors do not require a credit premium for the risk that the bank might fail. The interest a bank pays on deposits is the product of two things: the rate it offers and the share of deposits that are interest-bearing. Checking accounts at most large banks pay zero or near-zero; savings accounts at branch-heavy institutions pay rates that have historically lagged the federal funds rate by a wide margin; high-yield savings at online-first banks track market rates much more closely.

The gap between the rate the bank earns on its assets and the rate it pays for its deposits is the deposit-pricing decision. It is one of the most consequential business decisions a retail bank makes, and one of the least visible to depositors. When the federal funds rate rises, the rates a bank earns on new loans and on its securities portfolio rise quickly; the rates it pays on existing checking and savings accounts may not move at all. This is what bankers mean by "deposit beta" — the fraction of a Fed rate move that flows through to deposit costs. A low deposit beta is the source of the outsized net interest margins many U.S. banks reported in 2022 and 2023. See the Federal Reserve, plainly for how the policy rate reaches the retail balance sheet.

Fee income: the second piece

Non-interest income at a retail bank comes from a handful of sources. The composition varies by institution, but for a typical large U.S. bank with a meaningful retail franchise, the categories are roughly:

• Card interchange — the per-transaction fee paid by the merchant's acquiring bank to the cardholder's issuing bank. For credit cards, interchange is unregulated and typically runs 1.5% to 2.5% of the transaction amount, varying by network, card type, and merchant category. For debit cards issued by large banks, interchange is capped by Regulation II (the Durbin Amendment) at 21 cents plus 0.05% per transaction, plus a 1-cent fraud-prevention adjustment. See what happens when you swipe a card.
• Account service fees — monthly maintenance fees on deposit accounts, ATM fees (own-bank and out-of-network), wire-transfer fees, stop-payment fees, paper-statement fees, dormancy fees. Disclosed up front under Regulation DD and itemized on periodic statements.
• Overdraft and non-sufficient funds fees — historically one of the largest fee lines at consumer-focused banks; reduced substantially at many large banks between 2022 and 2024 either by elimination of the NSF fee, lower overdraft charges, grace periods, or removal of the practice entirely. See overdraft fees, in detail.
• Wealth-management and brokerage fees — at banks that also offer investment services, advisory and brokerage fees from affiliated registered broker-dealers and investment advisers.
• Mortgage origination and servicing income — gains on the sale of newly originated mortgages into the secondary market, and fees received for servicing pools of mortgages on behalf of the ultimate investors.
• Securities and trading revenue — at the largest banks, gains on dealer activity in fixed income and equities. For a community bank or pure retail player, this line is essentially zero.

The CFPB has issued or proposed several rules narrowing specific fee lines: credit-card late fees, overdraft fees at banks above defined asset thresholds, and "junk fee" practices more broadly. Several of these rules have faced legal challenge and the implementation status changes; check the rule in question against the CFPB's most recent activity before relying on a specific figure.

Float and other small lines

Historically, retail banks earned material revenue from float — the interval between a payment leaving a payor's account and arriving in a payee's, during which the bank held the funds and could earn interest on them. Check 21 (2004) and the rise of electronic payments have almost eliminated float as a retail revenue source. There is still a small residual in international wires, in pending card authorizations, and in some commercial-cash management products, but for a typical consumer deposit relationship the float income is trivial.

Other small but real revenue lines include foreign-exchange margin on international wires and on card transactions in foreign currencies (typically 1% to 3% above the wholesale rate); safe-deposit-box rental; bank-officer notary services; lending-account-related fees such as late fees and convenience-payment fees; and balance-sheet capacity itself — banks earn fees for letting customers use the bank's standing to issue letters of credit, accept commercial paper, or guarantee performance.

Cost structure

A bank's expense side is dominated by three lines: personnel (the largest single line at most institutions), occupancy and technology, and credit losses. Personnel costs cover both customer-facing staff and the much larger back-office, technology, legal, compliance, and risk-management functions; the cost of compliance with bank regulation is substantial and has grown materially since Dodd-Frank. Occupancy and technology have shifted over the past two decades from a branch-heavy model toward a mixed model: large banks have closed branches steadily while increasing technology spend, and online-first banks operate with no branch network at all.

Credit losses — the provision a bank takes when it expects loans to default — are the most volatile line on the expense side. In a benign credit environment, provisions are small and may even be negative (a reserve release). In a downturn, provisions can swing into multiples of normal levels and consume most of a bank's pre-provision earnings. The Current Expected Credit Loss accounting standard, effective for large banks in 2020, requires that the lifetime expected loss on a loan be recognised at origination rather than as losses emerge, which has the effect of front-loading provisions.

The ratio that summarises operating efficiency is the efficiency ratio: non-interest expense divided by the sum of net interest income and non-interest income. For a well-run U.S. retail bank the efficiency ratio is in the high 50s to low 60s; an online-first bank with no branch network can achieve substantially better. Differences in efficiency are a major driver of which banks can sustain offering high deposit rates and low fees.

The shape of the trade-off

A retail bank that wants to grow deposits has four levers: rate, fee structure, branch footprint, and brand. The four trade off against each other. A branch-heavy bank with strong brand recognition can pay below-market deposit rates because customers value the physical presence; an online-first bank pays close-to-market rates because it has nothing else to offer. A bank that eliminates overdraft fees forgoes a revenue line but reduces customer attrition and regulatory exposure; a bank that retains them collects the revenue and bears the consequences.

For depositors, the structure of bank revenue helps explain a number of otherwise puzzling features of the U.S. consumer-banking market: why the same large bank offers materially different deposit rates in different products, why "free" checking exists alongside aggressive fee schedules on adjacent products, why some banks pay close to the Fed funds rate on savings and others pay one-tenth as much. None of these are accidents; each is a deliberate choice in how a bank assembles the revenue it needs from the customer base it has.

Limits and uncertainty

The composition of revenue described here is a 2025–2026 snapshot of a long-running shift. Over the past two decades, regulatory and competitive pressure has narrowed several fee lines (interchange, overdraft, late fees) while a low-rate environment squeezed net interest margins. The 2022–2023 rate-hiking cycle widened margins again, but at the cost — for some institutions — of an outflow of price-sensitive deposits to higher-rate alternatives, which contributed to the failures of Silicon Valley Bank and Signature Bank. The next decade will likely see continued pressure on fees and on the deposit-pricing models that have sustained branch-heavy retail banking. The structure described above is durable; the magnitudes are not.