How banks make money from you, and how to claw some back
Profits have dropped at big banks this year but they’re still pocketing billions from interest rates. Here’s how to minimise your payments.
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Bank profit reporting season has ended and while there’s been some hefty falls, billions of bucks are still being generated from their customers.
NAB announced a 37 per cent decrease in annual profit to $3.7 billion on Thursday, following recent sharp drops by Westpac, ANZ and the Commonwealth Bank.
However, the big four banks still pocketed more than $17 billion in cash profits for 2020.
Just how the banks make their money may surprise many consumers, and there are several ways for customers to claw some back.
Baker Young Stockbrokers managed portfolio analyst Toby Grimm says there’s a “feeling out there that it’s fees and commissions” creating big bank profits, but the reality is most bank profits come from net interest earned.
They receive much more interest from home loans, credit cards than other debts than the interest they pay out on deposits.
“The interest side of the business is at least six times as big as the fees side,” Grimm says.
Income from fees and other non-interest sources has been falling, he says, with CBA’s non-interest income halving since 2015 as the rise of non-bank lenders forces them to be more competitive and cut fees.
Investment newsletter Marcus Today’s chief operations officer, Chris Conway, says many people don’t realise the bulk of bank profits comes from their loan books.
The money they lend us comes from their deposits or their own borrowing on global lending markets, and there’s typically a profit margin of at least 2 per cent on every dollar they earn. So when hundreds of billions of dollars are lent to customers, billions in profits are earned.
Conway says savvy customers can get back some of that money by negotiating a better deal on their home loans or engaging specialists such as mortgage brokers to help them.
“You can call and renegotiate,” he says.
“I don’t think there’s ever been a period where people with home loans have had more ability to negotiate.”
Customers can threaten to switch to force their bank’s hand, Conway says, and adds that some lenders will pay you if you move your mortgage to them. Average credit card interest rates are near 20 per cent but customers can often get a rate for half that, he says.
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