Understanding Business Model of Banks.
                     Understanding Business 
Model of Banks
Introduction
• Banks are commercial profitable institutions and 
need to increase their business, grow their 
revenue, and provide returns to their owners. 
• Unlike other stores and shops, banks are 
providing services rather than selling their 
products.
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Depositors
• People who put money into banks are called 
depositors. 
• Banks encourage deposits by protecting the 
money and by paying the depositor interest, a 
percentage of revenue earned on the principal 
over a period of time. 
• The depositor thus earns some money from the 
deposits. 
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Borrowers
• Using the accumulated funds of many depositors, 
the bank makes loans to customers it considers 
likely to repay. When banks lend money, they put 
it to work. 
• The bank charges more interest on the money it 
lends than it pays depositors, so when the money 
is repaid; more comes in than going out. 
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Interest Spread
• The difference between what a bank pays in 
interest and what it receives in interest is the 
spread or net interest income.  
• The spread is not pure profit. The spread is 
income or revenue, but costs have yet to be 
considered. 
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Banking Costs
• Costs include maintaining the security of your 
money, personnel expenses, building 
maintenance costs, and so forth. 
• Profit, or net income, is what's left of revenue 
after costs are deducted.
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Other Income Sources
• Banks have additional income sources. In 
addition to loan income, including credit-card 
interest, they also charge for various services. 
• Charges include fees for rental of safe-deposit 
boxes, checking account maintenance, online bill 
payment, and ATM transactions.
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Other Income Sources Cont.
• It is important to note that banks do not earn 
interest on money kept on hand for services such 
as ATM transactions. 
• Thus, banks charge fees to offset lost interest. To 
keep pace with the rising cost of servicing 
accounts, fees for services have increased 
significandy. These service fees provide 
substantial revenues for banks.
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Investments
• Banks, like people and other corporations, make 
money on investments. 
• They invest in stock markets and some types of 
securities and government bonds. 
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Risk Associated
• While investing their money in instruments other 
than government bonds, they face the same risks 
as other investors. 
• They hire professional investment staff to 
maximize their return on investments.
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Assets and Liabilities
• A bank's assets are its loans and investments, 
which may be less liquid by contract than 
deposits. 
• Deposits may have to be returned any time, but 
assets can arrive in small amounts over a long 
period. 
• A bank's liabilities exceed its reserves. The money 
is loaned out, and the reserves don't match the 
total of deposits (liabilities). 
• However, the money is out working, financing 
businesses and expanding the economy. 
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