The one-sentence answer

A bank makes most of its money by lending out the money you deposit, and charging borrowers more interest than it pays you. Your deposit is not sitting in a vault; it is the raw material the bank lends on, and the gap between the two rates is the heart of banking.

Net interest income, the core engine

When you deposit money, the bank pays you a little interest, or sometimes none. It then lends most of that money out as mortgages, car loans, business loans and credit-card balances, charging a higher rate. The difference between what it earns on loans and pays on deposits is called net interest income, and the gap as a percentage is the net interest margin. It is the single most watched number in bank earnings, which is why rising and falling interest rates matter so much to bank profits. Our explainer on how the Federal Reserve works covers where those rates come from, and our coverage of bank earnings shows the margin in action.

Fees, the second engine

Lending is not the only source of income. Banks also charge fees: account and overdraft fees, card and payment fees, fees for moving money, and charges for services such as wealth management and, at the largest banks, investment banking and trading. For some banks, fee income rivals lending income, and it tends to be steadier because it does not depend on interest rates in the same way.

The risk behind the model

Lending is profitable because it is risky. Some borrowers do not repay, so banks set aside money for expected losses, called provisions, which rise when the economy looks shaky. A bank that lends too loosely can be wiped out by bad loans; one that lends too cautiously earns too little. Managing that balance is the real skill of banking.

Why confidence is everything

Because a bank lends out most of the deposits it holds, it could not repay everyone at once if they all asked on the same day. Banking runs on the confidence that they will not. When that confidence breaks, a bank run can bring down even a solvent bank, which is why governments created deposit insurance. Our explainer on how FDIC insurance works covers the backstop that keeps savers calm.

Not all banks earn the same way

How a bank makes money depends on what kind it is. A traditional retail or commercial bank leans on net interest income from everyday deposits and loans. An investment bank earns more from advising on deals, trading and helping companies raise money, income that swings with markets. The largest banks do both, which is why their results can hold up when one side is weak, and why reading a bank's earnings means knowing which engine is driving them this quarter.

What it means for you

Understanding the model changes how you use a bank. The spread the bank earns is money coming partly out of your pocket, so a higher savings rate is worth shopping for, especially when rates are high. Watch fees, which quietly add up, and keep large balances within the limits of deposit insurance. The glossary and the rates and returns tracker can help you compare.

The bottom line

Banks make money by lending your deposits at a higher rate than they pay you, topped up with fees, while managing the risk that some loans go bad and the confidence that lets the whole thing work. Once you see your deposit as a bank's raw material rather than a stored box of cash, the case for shopping around on rates and fees becomes obvious.