Banks like JPMorgan, Bank of America, and Goldman Sachs make money with consumer banking, investment baking, commercial banking, and asset and wealth management. Those banks collect fees for the services provided. Also, banks earn on the interest of the money borrowed.
Revenue Generation Method
Description
Advantages
Drawbacks
Interest Income
Banks earn money by charging interest on loans and mortgages they provide to customers. They also earn interest on government and corporate bonds and other interest-bearing assets.
– Steady and reliable income stream. – Earnings can be significant with a large loan portfolio.
– Susceptible to fluctuations in interest rates. – Risk associated with loan defaults.
Fees and Commissions
Banks charge fees for various services, such as account maintenance, ATM withdrawals, wire transfers, and financial advisory services.
– Diversifies revenue sources. – Provides income regardless of interest rate fluctuations.
– May face competition from fee-free or low-fee alternatives. – Customer dissatisfaction with fees.
Asset Management
Banks manage investment portfolios for clients, charging management fees based on assets under management (AUM). Banks may also earn fees for mutual fund sales and advisory services.
– Potential for high-profit margins, especially with high AUM. – Recurring fees contribute to stable income.
– Market fluctuations can impact AUM and fee income. – Regulatory compliance and fiduciary responsibilities.
Trading and Investment Banking
Banks engage in trading activities, buying and selling financial instruments like stocks, bonds, and derivatives. They also offer investment banking services, earning fees from mergers, acquisitions, and IPOs.
– Opportunities for substantial short-term gains. – Investment banking fees can be lucrative. – Diversifies income streams.
– Risk of trading losses, particularly in volatile markets. – Cyclical nature of investment banking business.
Securitization
Banks bundle loans, such as mortgages or auto loans, into securities and sell them to investors. This generates fees and reduces the bank’s exposure to loan defaults.
– Generates upfront fees from securitization. – Mitigates credit risk by transferring it to investors.
– Complexity and regulatory scrutiny in securitization transactions. – May lead to moral hazard if banks are not careful.
Asset Securitization
Banks create and sell financial instruments backed by a pool of assets, such as credit card receivables or mortgages, to investors. This can free up capital for more lending.
– Raises capital for additional lending. – May improve capital adequacy ratios.
– Risk associated with the performance of underlying assets. – Regulatory requirements for securitization.
Investment Income
Banks invest in various assets, including government and corporate bonds, equities, and real estate, and earn income from dividends, interest, and capital gains.
– Diversifies income sources. – Opportunity for long-term capital appreciation. – Can benefit from market trends.
– Market volatility can lead to investment losses. – Requires expertise in asset allocation and risk management.
Wealth Management
Banks provide wealth management services to high-net-worth clients, earning fees for portfolio management, financial planning, and estate planning.
– High-profit margins from affluent clients. – Recurring fees for ongoing services. – Opportunity for cross-selling.
– Requires specialized expertise and compliance with regulations. – Competitive landscape with other wealth management firms.
JPMorgan operates four major reportable business segments:
Consumer & Community Banking
Corporate & Investment Bank
Commercial Banking
Asset & Wealth Management.
Corporate
The primary operating segments of JPMorgan Chase are summarized below:
Source: JPMorgan Chase Annual Report (2017)
How does Goldman Sachs make money?
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Goldman Sachs (2021)
Investment Banking
$14.16B
Commissions and fees
$3.62B
Market making
$15.35B
Investment Management
$8B
Goldman Sachs is a leading global investment banking, securities and investment management firm. Goldman provides a wide range of financial services that are reported under four business segments:
Investment Banking
Institutional Client Services
Investing& Lending
Investment Management
The four primary segments and the services offered for each are described below:
Source:Â Goldman Sachs Annual Report (2017)
The Institutional Client Services services are the largest segment of the bank. I comprise fixed income, currency and commodities client execution. This segment is followed by investment banking, investing and lending and investment management.
If we look at Goldman Sachs revenues based on the primary services provided:
Source: Goldman Sachs Annual Report (2021)
Investment banking together with market making are the primary sources of income.
The market making consists on having a reserve of certain financial instruments so that when a buyer or seller of that financial instrument is willing to make a transaction, she/he will be able to do so, even in the absence of a buyer/seller on the other side.
Indeed, the market maker is the one acting as a counterpart, thus making the transaction possible. This ensures market liquidity and smooth transactions even when none is queuing on that transaction.
Those market-making revenues consist of revenues (excluding net interest) from client execution activities related to interest rate products, credit products, mortgages, currencies, commodities and equity products.
The largest segment is Consumer Banking which comprises. Deposits and Consumer Lending, including traditional savings accounts, money market savings accounts, CDs and IRAs, noninterest-and interest-bearing checking accounts.
Deposits generate fees such as account service fees, non-sufficient funds fees, overdraft charges, and ATM fees, as well as investment and brokerage fees from Merrill Edge accounts.
Below the primary segments and all the related activities of Bank of America:
Who manages the most assets under management among JP Morgan, Bank of America and Goldman Sachs banks?
Total Assets Managed
JPMorgan
Bank of America
Goldman Sachs
2016
$1,771B
$886B
$1,379B
2017
$2,034B
$1,080B
$1,494B
Massive banks like JPMorgan, Bank of America, and Goldman Sachs manage from billion to trillion of assets. Indeed, a key metric to assess the success of any bank is its ability to attract client’s assets. In short, banks manage those assets for the clients and earn commissions on the asset management performed.
For, instance, in 2017 JPMorgan managed over two trillion of assets, while Goldman Sachs managed almost one and a half trillion and Bank of America over a trillion. This metric of the assets under management is critical to assess the business model sustainability of those banks as it is also a measure of trust clients might have toward those banks.
Who makes more revenues among JP Morgan, Bank of America and Goldman Sachs banks?
Total Net Revenues
JP Morgan
Bank of America
Goldman Sachs
2016
$95.66B
$83.70B
$30.60B
2017
$99.62B
$87.35B
$32.07B
At a revenue level, JPMorgan made almost $100 billion in 2017, compared to over $87 billion from Bank of America and over $32 billion from Goldman Sachs.
Key Highlights:
JPMorgan, Bank of America, and Goldman Sachs make money through various revenue streams, including investment banking fees, principal transactions, landing and deposits-related fees, asset & wealth management, mortgage fees, card income, and other income.
JPMorgan operates four major reportable business segments: Consumer & Community Banking, Corporate & Investment Bank, Commercial Banking, and Asset & Wealth Management.
Goldman Sachs provides a wide range of financial services under four business segments: Investment Banking, Institutional Client Services, Investing & Lending, and Investment Management.
Bank of America has four business segments: Consumer Banking, Global Wealth & Investment Management, Global Banking, and Global Markets.
The largest segment for Bank of America is Consumer Banking, which includes deposits and consumer lending, generating fees and interchange revenue.
JPMorgan managed over two trillion of assets in 2017, Goldman Sachs managed almost one and a half trillion, and Bank of America managed over a trillion, indicating their ability to attract client assets and build trust.
JPMorgan made almost $100 billion in total net revenues in 2017, Bank of America made over $87 billion, and Goldman Sachs made over $32 billion.
Revenue model patterns are a way for companies to monetize their business models. A revenue model pattern is a crucial building block of a business model because it informs how the company will generate short-term financial resources to invest back into the business. Thus, the way a company makes money will also influence its overall businessmodel.
A pricingstrategy or model helps companies find the pricing formula in fit with their business models. Thus aligning the customer needs with the product type while trying to enable profitability for the company. A good pricingstrategy aligns the customer with the company’s long term financial sustainability to build a solid businessmodel.
Price sensitivity can be explained using the price elasticity of demand, a concept in economics that measures the variation in product demand as the price of the product itself varies. In consumer behavior, price sensitivity describes and measures fluctuations in product demand as the price of that product changes.
A price ceiling is a price control or limit on how high a price can be charged for a product, service, or commodity. Price ceilings are limits imposed on the price of a product, service, or commodity to protect consumers from prohibitively expensive items. These limits are usually imposed by the government but can also be set in the resale price maintenance (RPM) agreement between a product manufacturer and its distributors.
Price elasticity measures the responsiveness of the quantity demanded or supplied of a good to a change in its price. It can be described as elastic, where consumers are responsive to price changes, or inelastic, where consumers are less responsive to price changes. Price elasticity, therefore, is a measure of how consumers react to the price of products and services.
In Economics, Economies of Scale is a theory for which, as companies grow, they gain cost advantages. More precisely, companies manage to benefit from these cost advantages as they grow, due to increased efficiency in production. Thus, as companies scale and increase production, a subsequent decrease in the costs associated with it will help the organizationscale further.
In Economics, a Diseconomy of Scale happens when a company has grown so large that its costs per unit will start to increase. Thus, losing the benefits of scale. That can happen due to several factors arising as a company scales. From coordination issues to management inefficiencies and lack of proper communication flows.
A network effect is a phenomenon in which as more people or users join a platform, the more the value of the service offered by the platform improves for those joining afterward.
Gennaro is the creator of FourWeekMBA, which reached about four million business people, comprising C-level executives, investors, analysts, product managers, and aspiring digital entrepreneurs in 2022 alone | He is also Director of Sales for a high-tech scaleup in the AI Industry | In 2012, Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy.
