Some people do wonder how banks seem to make so much money on certain types of accounts. It may be obvious that they make money on loans because they charge interest which covers their cost and gives them a profit. However, checking accounts or current accounts are different and it can be tricky to know how they make money from these. These are usually free accounts where you will do your day to day banking such as direct debits, drawing cash, paying by debit card and things like this. There are often lots of transactions involved and so this potentially could be very costly for the bank and so it may seem unclear to understand how they make money from this type of account.
An authorised overdraft is when you borrow some money from your current account that has been authorised by the bank. Often, when you open an account, you will find that they will offer you a certain amount of borrowing for when you need it. This will not be free, they will charge you interest on the money that you are borrowing and therefore they will make money that way. You will normally be charged quite a high rate of interest for the period that you are overdrawn.
An unauthorised overdraft is when money is borrowed without it being offered by the bank. This could be where they have not allowed an overdraft on the current account, which happens when a bank do not think a person has a good enough credit record for them to want to lend them money. It could also happen when someone borrows more than their authorised overdraft limit. This can happen when cash is withdrawn or a debit card is used when there is not enough money to pay for those withdrawals or a direct debit comes through. Unauthorised overdrafts are much more expensive than authorised overdrafts and so they are something which will make a lot more money for the bank.
Charging for the account by adding benefits
Some banks charge for current accounts and make money that way. They often add in certain perks for customers to encourage them to pay for their account. These could be interest on certain purchases, cashback, free insurance and other things. They can make money out of these if the customers do not make full use of the benefits that they are offered and these types of accounts are likely to have overdraft facilities as well which they will also be able to make money out of.
Therefore there are a lot of ways that banks can make money out of current accounts. They also make money out of other types of lending which is by far the biggest way that they make money. They accept savings and pay interest on them, which they do not make a profit on, but holding that money allows them to be able to lend it out to others and therefore make a profit.