Banks make profit in various ways but typically what they are doing is taking smallish margins as middlemen on financial transactions of large volumes of money. They are also experts in risk assessment related to financial transactions.
A few examples from retail banking:
Currency exchange: Banks can exchange currency with very little cost due to their netting and aggregating individual transactions and acting with huge volumes. However for any currency exchange that their customers undertake the bank will charge a margin on the exchange rate at a much higher level than their costs.
Mortgage book: Banks use their expertise to assess the risks of customers borrowing to purchase houses and set the interest rate on the loan at a level such that any defaults are covered by the overall book. The interest rates on the loan also cover the cost of their capital which typically comes from deposits from other customers.
One of the reasons why cryptocurrency is interesting is the potential for individuals to disrupt these margins by interacting between themselves and without the middleman. The cryptocurrency provides the medium for these transactions and keeps them out of the infrastructure controlled by the banks.
There are very many sources that become gold fields for banks, both conventional banks and Islamic banks, both have many fields, it's just that conventional and sharia have different ways.
Here are some of the bank's most profitable sources of income from banking operations:
1. Advantages of interest or profit sharing
The most identical with banks are interest (conventional banks) and profit sharing (Islamic banks). This is the main source of income for each bank. Interest And profit sharing is the income received by the bank from the party who borrowed the money from the bank. Own bank lending the money using money collected from its customers.
2. Benefits of Confiscated Assets
When you try to borrow money at a bank, you may not be familiar with the term collateral. Yes, that is a guarantee for the bank so as not to lose when there is bad credit. Although I think the bank will never expect bad credit to occur, but utilizing guarantees provided by the borrower can provide benefits for the bank. Yes, banks can sell or rent loan assets from bad loans.
3. Per-Service Income (Fee Based Income)
Fee based income is income obtained by the bank from each service provided to customers. There are many forms, the easiest example is the monthly administration fee, the transfer fee to another account.
4. Benefits of investment
Banks are indeed identical with sources of income from interest and profit sharing, but in reality banks often innovate to find other sources of income, one of them is by investing. Just like the loan concept, banks in making investments also use their customers' funds, not bank funds. It's just that, the bank cannot just use the funds owned by the customer, but the customers themselves must volunteer to invest.
5. Benefits of Safe Deposit Box (SDB) Services
One of the banking service products that is no less popular than other products is Safe Deposit Box, or often abbreviated as SDB. This is a very safe item storage service, just like you save money in a bank, storing goods in the bank is equally safe.
Bank profits are obtained from bank income, sources of bank income, namely:
Interest income is obtained from customers (debtors) who borrow funds in the form of credit. The amount of interest income depends on the amount of credit disbursed and the interest rate determined. Each bank has a different interest rate policy that is adjusted to the cost of funds, strategy and competition.
Banks apply different interest rates for various types of credit or customer segments. For individual customers, credit cards and consumption loans without collateral are subject to higher interest rates by banks, while home ownership loans (KPR) or vehicle ownership loans guaranteed by the assets purchased are subject to low interest rates rather than unsecured loans.
Corporate customers who apply for working capital loans or investment loans for productive purposes with guaranteed assets are generally subject to lower interest rates than individual loans. The Bank also charges different interest rates for each debtor in accordance with the credit rating and ability of the debtor to pay.
Fee based income (FBI)
The FBI is the income derived from collecting fees for services provided by the bank. The simplest example of the FBI is the monthly administration fee charged to a savings and debit card account and the annual credit card fee.
In addition to the examples mentioned above, banks also get income from various other services such as L / C issuance, issuance of bank guarantees (BG), fees charged on credit, interbank transfer fees (clearing or real time / RTGS gross payment system). ) ), the cost of transferring foreign exchange (telegraphic transfer), administrative costs for the purchase of top-up or electricity cellular phones, as well as other costs that are sometimes not realized by customers such as the cost of printing ATM receipts.
In principle, banks will try to charge fees for services provided or benefits enjoyed by customers. The Bank will also apply penalties for various customer negligence, including by imposing penalties for late credit card payments or debit card reprint fees and lost passbooks.
Gain from spot and derivative transactions.
The activities of foreign exchange banks with more complex business and operations are not limited to the collection and distribution of funds or the provision of financial services, but also include trading of financial instruments that are permitted according to rules such as bonds (bonds), foreign exchange (foreign exchange), or derivative instruments intended to benefit. This activity is generally carried out by dealers in treasury work units.
The profit from spot and derivative transactions is the profit derived from the trading activities of the financial instruments mentioned above. As an illustration, a forex dealer made a $ 1 million spot purchase transaction of $ 1 million at an exchange rate of 13,500 and closed that position at an exchange rate of 13,700. From the dealer transaction, the bank gets a profit of Rp. 200,000,000.
Dividends are bank income derived from the company's dividend deposit, some of which are owned by banks, but the financial statements are not consolidated.
Other income is bank income which cannot be categorized in the items discussed earlier. Examples of income that fall into this category are income derived from the sale of fixed assets, building leases, or the execution of customer collateral that has been controlled by the bank.
Advantages of interest or profit sharing
The most identical with banks are interest (conventional banks) and profit sharing (Islamic banks). This is the main source of income for each bank. Interest and profit sharing are income received by banks from those who borrow money from the bank. The bank itself, lending the money uses money collected from its customers.
So here the bank does not use the money, but uses the customer's money to provide loans to borrowers. And that's where banks benefit from interest or profit sharing.
Simple illustrations like this, you save in the bank for 10 million, your 10 million will be used by the bank to lend money to other people. Well, people who borrow money at the bank are obliged to return 10 million plus interest or bank profit sharing, say 12 million including interest / profit sharing. The bank will automatically get a profit of 2 million.
The question is, what if you want to take the 10 million money even though the money has been used by the bank to channel credit, and the borrower has not been completed in returning the 10 million? The answer is no problem because banks still have savings from other customers that can be used to bail if you want to take money. And if the savings from other customers are still lacking because many also want to take their funds, as far as I know the bank can look for bailouts from Bank Indonesia which may not run out of money because they have the frequency and control of money circulating in Indonesia.
Benefits of investment
Banks are indeed synonymous with sources of income from interest and profit sharing, but in reality banks often innovate to find other sources of income, one of which is investment. Just like the loan concept, banks in making investments also use their customers' funds, not bank funds. It's just that, banks cannot just use the funds owned by customers, but the customers themselves must voluntarily participate in investing.
In return, customers will also get a share of the investment returns. The form of investment that is often carried out by banks is in the form of mutual funds. Well, this mutual fund can be purchased by customers, without buying it, customers will not participate in bank investment.
But what you need to understand is that the name is investment, so there is no risk of failure, so when you buy a mutual fund there is no guarantee of money going back. Because of this reason the bank cannot use customer funds without voluntary customers, unlike loans that will definitely return.
Benefits of Safe Deposit Box (SDB) Services
One of the banking service products that is no less popular than other products is Safe Deposit Box, or often abbreviated as SDB. This is a very safe item storage service, just like you save money in a bank, storing goods in the bank is equally safe. To use this one bank service, customers will be charged a fee.
The services of this bank are quite in demand in the market, especially for companies in storing securities, or people with high economic ability to store assets and other important items.