Banks - How Do they Make Money from Me?

[saintjohnny]

Yesterday I opened an ISA account with HSBC. I have put �100 into it and HSBC are paying me 4.52% interest. Can anyone tell me how the bank is possibly making any money from me in this instance? It seems like a free service, but that surely can't be the case???

[WendyS]

I believe the current bank rate is 4.5% so you they're paying you very marginally over this rate. However, as all interest on a cash ISA is tax free, at least you won't have to pay any tax on it. Banks make their money by loaning customers money and charging exorbitant rates of interests on the loans or on the interest on their credit cards. So, while HSBC are paying you 4.52% interest, the poor souls who are borrowing this �100 from them are probably paying three times as much interest on their debts. And if you have a current account with surplus cash in it, they're probably paying you a miserly rate of about 0.2% interest. Never leave more spare cash than you need in your current account. Move it a.s.a.p to the highest rate savings account you can find. If you're working, you're paying tax, so it's sensible to use your ISA tax free allowance if you can, although you should always pay off any debts first because the interest rate on them will invariably be higher.

[saintjohnny]

Wow! Thanks, that makes sense. So in essence, it all relies on there being enough people to shift the money around then?

[WoWo]

That's right on a basic level they loan out the deposits at a higher interest rate than they pay.

So a savings account whould get 4% but a loan would incur 6% therefore they get the 2% difference.

[spacechimp]

Certain ISAs charge you an fee to withdraw money and if they aren't instant access, then they might not let you earn interest on your money when you're waiting for the funds to become available.

[antiguru]

Don't get humg up on the type of product it is. To the bank it is all cash. Cash is a commodity they can use to go and invest in markets the likes of you and I will never touch. Here they make serious money. No piddling amounts we know as interest. This is not as risky as it sounds for you and me. That's why we have the Bank Of England underwriting banking in the UK.

Also, don't forget that the BOE rate is the public rate. Banks trade in different worlds.....

[stevie21]

As mentioned, you give them �100 and they pay you 4.52% interest.
They loan someone else that money and charge more (depending on how it's lent : mortgage, unsecured loan, credit card etc.).
This is simple logic rather than WendyS's loan sharking implication.

There's also the fact that banks will lend money to the governement and invest in other companies. The stock market, on average, grows about 10% per year if money is invested for long enough.