Banks are businesses like any other enterprise. They make their money using complicated systems and formulas, often at the expense of their customers. However, banking experts like Dan Schatt say there are some key concepts that your bank does not want you to know. Here a some of the most important ones:
1) Fees are not always transparent.
There’s nothing in the banking industry that’s more misunderstood than fees. Banks make money through different kinds of fees. Overdraft fees occur when customers write a check for an amount higher than their account or withdraw more money from an ATM than is available. Variable fees vary for every customer, depending on which services you use or how much you’ve deposited into your account.
2) Banks oversell to boost profitability.
Banks allow an amount of service (or credit) to their customers, but they may also allow more customers onto that service than is available. This “overselling” practice boosts profits but can cause problems. For example, if you’re part of a bank’s oversold customers, you could be denied the service you need – like an ATM withdrawal – even though your account is in good standing.
3) Banks use low-balance accounts to make money.
As banks have become more competitive, they have found ways to maximize their revenue through tactics that are now standard practice across the industry. One of those is to charge monthly fees for customers who maintain what is known as “low-balance” or “dormant” accounts that have remained inactive for lengthy periods. The fee may just be $5 per month, but that adds up quickly if the account contains thousands of dollars in savings and sits untouched for two years – as is often the case. Banks can invest that money, use it to fund new loans, and keep the income from the interest.
4) Your bank account may not be protected by FDIC insurance.
When you put your money in a bank, the Federal Deposit Insurance Corporation (FDIC), which insures against losses due to bank failure or bankruptcy, guarantees that you will receive back at least the amount of money you originally deposited into that account. New accounts are insured by default when they become active; however, inactive accounts can lose their FDIC protection if they remain dormant for too long. This means any funds beyond what you initially deposited could be forfeited forever if your financial institution goes under. Even though it’s illegal for a bank to take your money, there’s no guarantee that this won’t happen.
5) Certain accounts are more profitable than others.
Banks can charge customers higher fees or interest rates for some accounts because they know customers will be less likely to switch from those services. For example, individual retirement accounts (IRAs) and certificates of deposit (CDs) typically pay better interest rates on deposits because consumers tend to stick with the same rate when the term ends – even if it then becomes unattractive compared with current rates. Banks also use “up-sell” tactics to convince account holders into using new services that may be more profitable for the institution but not necessarily for their customers. In many cases, these tactics work by rewarding customers with low rates, free checking, or even cash incentives in exchange for using them.