how-do-banks-make-money

How Do Banks Make Money? Banks Business Model In A Nutshell

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.

How does JPMorgan make money?

  JPMorgan (2021)
Investment Banking Fees $13.2B
Principal Transactions $16.3B
Landing and Deposits Related Fees $7B
Asset & Wealth Management $21B
Mortgage Fees $1.17B
Card Income $5.1B
Other Income $4.8B

JPMorgan operates four major reportable business segments:

  • Consumer & Community Banking
  • Corporate & Investment Bank
  • Commercial Banking
  • Asset & Wealth Management.
  • Corporate

JPmorgan-revenues

The primary operating segments of JPMorgan Chase are summarized below:

jpmorgan-chase-business-segments

Source: JPMorgan Chase Annual Report (2017)

How does Goldman Sachs make money?

  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:

goldman-sachs-business-segment

Source: 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:

goldman-sachs-revenues-2021

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.

How does Bank of America make money?

  Bank of America (2021)
Card income $6.22B
Service charges $7.5B
Investment and brokerage services $16.69B
Investment banking fees $8.88B
Market making and similar activities $8.69B

Bank of America has four business segment:

  • Consumer Banking
  • Global Wealth & Investment Management
  • Global Banking
  • Global Markets

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.

Consumer Lending generates interchange revenue from:

  • credit and debit card transactions
  • late fees
  • cash advance fees
  • annual credit card fees

bank-of-america-financial-highlights

Source: Bank of America Annual Report (2017)

Below the primary segments and all the related activities of Bank of America:

bank-of-america-segments

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 revenue level, JPMorgan made almost $100 billion in 2017, compared to over $87 billion of Bank of America and over $32 billion of Goldman Sachs.

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Connected Business Concepts

Revenue Modeling

revenue-model-patterns
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 business model.

Pricing Strategies

pricing-strategies
A pricing strategy 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 pricing strategy aligns the customer with the company’s long term financial sustainability to build a solid business model.

Dynamic Pricing

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Price Sensitivity

price-sensitivity
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.

Price Ceiling

price-ceiling
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

price-elasticity
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.

Economies of Scale

economies-of-scale
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 organization scale further.

Diseconomies of Scale

diseconomies-of-scale
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.

Network Effects

network-effects
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.

Negative Network Effects

negative-network-effects
In a negative network effect as the network grows in usage or scale, the value of the platform might shrink. In platform business models network effects help the platform become more valuable for the next user joining. In negative network effects (congestion or pollution) reduce the value of the platform for the next user joining. 

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