Do Banks Make Money on Checking Accounts?

Checking accounts are a foundational element of a bank’s business model, providing basic transactional services often with low or no direct fees. Despite this, these accounts are instrumental in generating revenue for financial institutions. Banks employ several strategies to derive value from checking accounts, contributing to their profitability and allowing them to offer a wide range of financial services.

Interest Income from Deposits

Banks generate revenue from checking accounts by utilizing deposited funds for lending activities. They pool money from numerous customer accounts, which pay minimal or no interest to the account holder. For instance, the average interest rate on checking accounts in the United States is approximately 0.07%.

These aggregated deposits become a primary source of capital for various loans. These include mortgages, personal, auto, and business loans, which carry substantially higher interest rates than those paid on deposits. The difference between the interest earned on these loans and the interest paid on deposits, along with other funding costs, is known as the net interest margin (NIM).

Net interest margin represents a bank’s core profitability from its lending and borrowing activities. A positive NIM indicates the bank is effectively managing its assets and liabilities, earning more from its loans and investments than it costs to acquire funds. This spread between the low cost of checking account deposits and the higher interest rates on loans forms a substantial income stream for banks. This income stream covers operational costs, generates profits, and maintains financial stability.

Account-Related Fees

Banks generate revenue directly from checking accounts through various fees. These fees compensate banks for processing transactions, providing specialized services, or managing certain account behaviors. Monthly service fees, for instance, are common if an account holder does not meet specific conditions, such as maintaining a minimum daily balance or setting up direct deposits.

Overdraft fees and non-sufficient funds (NSF) fees are among the most prevalent charges. An overdraft fee applies when a transaction exceeds the available balance and the bank covers it. An NSF fee is charged when a transaction is rejected due to insufficient funds. These fees can range from $25 to $35 per occurrence.

Other common fees include charges for out-of-network ATM withdrawals, typically $2.50 to $3.00, separate from ATM owner fees. Wire transfer fees, for sending or receiving funds, can range from $0 to $50 for domestic transfers and $0 to $80 for international transfers, depending on the bank and transfer type. Additional fees may apply for services like stop payments on checks, requesting copies of past statements, or for account inactivity.

Debit Card Interchange Fees

Banks also earn revenue from checking accounts through debit card interchange fees. When a customer uses their debit card, the merchant’s bank (acquiring bank) pays a small fee to the cardholder’s bank (issuing bank). This fee, known as interchange, compensates the issuing bank for processing the transaction, covering risks, and maintaining the cardholder’s account.

Interchange fees are typically a percentage of the transaction amount plus a fixed fee. While merchants bear this cost, it indirectly contributes to the issuing bank’s revenue as customers use their debit cards. The average debit card interchange rate in the United States is around 0.3% to 0.5% of the transaction value.

The Durbin Amendment, part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, significantly impacted these fees for larger banks. For banks with assets exceeding $10 billion, the amendment capped debit card interchange fees at $0.21 plus 0.05% of the transaction value, with an additional $0.01 allowed for fraud prevention. This regulation reduced the average debit interchange fee for covered transactions from approximately $0.44 to $0.24, affecting a substantial portion of debit card transactions.

Strategic Value from Customer Relationships

Beyond direct fees and interest income, checking accounts hold strategic value as the initial point of contact for customer relationships. A checking account often becomes the primary financial hub for individuals, facilitating direct deposits of paychecks and managing daily expenses. This central role provides banks with valuable insights into a customer’s financial habits and needs.

This foundational relationship positions the bank to cross-sell other financial products. Banks can offer complementary products such as savings accounts, credit cards, various types of loans (mortgage, auto, personal), investment services, and even insurance. The ability to offer these additional products increases the overall revenue generated from each customer over their lifetime, a concept known as Customer Lifetime Value (CLV).

While the checking account itself might have a modest direct profit margin, its role in customer acquisition and retention is substantial. By analyzing transaction data and understanding customer behavior, banks can tailor offerings that align with a customer’s evolving financial journey. This approach fosters deeper relationships, encourages customers to consolidate their financial activities with one institution, and ultimately drives long-term profitability through a broader portfolio of services.