bank-buildingBanks offer products and services to meet the financial needs of its customers. Typical bank products and services include Savings Accounts, Checking Accounts, Credit Cards, Personal Loans, Car Loans, Home Mortgages, Investment Services, Online Banking and Bill Pay, Small Business Banking, and Corporate Banking.

Let’s get this out of the way up front. A bank is a For-Profit institution. What does this mean? The business model of a bank is to offer financial products and services to its customers and in turn earn profit that will not only allow it to keep its doors open but also please its shareholders. Most large banks are publicly traded companies. People buy shares of the bank and hope to make a profit off their investment.

How does it earn profit?
Banks earn profit in a few ways. They earn profit from fees charged to their customers, from interest earned off of loans, interest earned off of investing the money you deposit with them (you didn’t think your money just sat there did you?), and many other ways too numerous to mention. In reality, banks earn profit off the margin, that is, the difference between what it costs them to offer the services and loans, and what they charge you for the services and loans.

Shouldn’t these services be free?
We tend to get spoiled easily. Once we’ve seen something offered as ‘free’, we always expect it to be ‘free’. Why do we use quotes when saying ‘free’? Well, nothing is truly free. There’s always a cost somewhere. Ok, back to the point. If banks offered everything for free, where would they make their profit? If they didn’t make a profit, they couldn’t keep their doors open and continue to offer the financial products and services you need. So, what we’re saying is while it’s nice to get things for ‘free’, you also need to have realistic expectations. It’s always beneficial to shop around, because competition helps keep the costs lower, and you’ll almost always find someone who’s selling what you want at the price you want it.

Conflict of Interest
Banks run into problems because they are trying to serve two masters, the customers and the shareholders. No matter what, they have to do what is in the best interest of the shareholders, who may or may not be customers. What is in the best interest of the shareholders or stockholders does not always line up with what is in the best interest of the customers. That’s one of the reasons you tend to see higher fees at a bank than at a credit union. That’s also a reason that banks turn away people that are not profitable. Now don’t misunderstand. If a bank upsets its customer base too much, then it won’t have as many customers, which would not be in the best interest of the stockholders. It’s a tricky balancing act, and one that requires continual refinement.