How Banks Work: The Business Behind Your Savings

Why Banks Exist

At their core, banks solve a coordination problem. Some people have money they do not need right now (savers), while others need money they do not have yet (borrowers). Without banks, a saver would need to personally find a trustworthy borrower, negotiate terms, and accept the risk of not being repaid. A borrower would need to find someone with exactly the right amount of money, willing to lend at acceptable terms.

Banks sit in the middle. They collect deposits from millions of savers and pool that money together. From this pool, they make loans to individuals and businesses. The saver gets a safe place to keep money and earns a small return. The borrower gets access to funds they need for a home, a car, or a business. The bank profits from the difference between what it pays savers and what it charges borrowers.

This intermediation function is so fundamental that modern economies simply cannot function without it. Every time you deposit your paycheck, pay your mortgage, or swipe your debit card, you are participating in this system.

How Banks Make Money: The Interest Spread

The most important concept in banking profitability is the spread — the gap between borrowing costs and lending revenue.

Here is a simplified example. Suppose a bank pays you 4% per year on your savings account. It then lends your money to someone buying a house at 12% per year. The 8-percentage-point difference is the spread. From this spread, the bank pays its operating costs (branches, employees, technology, regulatory compliance) and keeps whatever remains as profit.

In Mexico, this spread tends to be wider than in many developed countries. Mexican banks often pay relatively low rates on savings accounts (sometimes near zero for basic accounts) while charging significantly higher rates on loans, especially credit cards, where annual rates can exceed 40% or even 60%. This wide spread is one reason why banking in Mexico is highly profitable for the major institutions.

Understanding the spread changes how you view your relationship with your bank. Your deposit is not simply money sitting safely in a vault — it is raw material the bank uses to generate revenue. This does not mean your money is at risk (deposits are insured, as you will learn later), but it does mean you should expect fair compensation for providing this raw material.

Types of Bank Revenue

While the interest spread is the primary revenue source, banks earn money in several additional ways:

Interest Income

This is the largest component. It includes interest from mortgages, auto loans, personal loans, credit card balances, and business loans. When you carry a balance on your BBVA credit card or pay your Banorte mortgage, you are contributing to the bank’s interest income.

Fees and Commissions

Banks charge fees for dozens of services. Common ones in Mexico include:

• Account maintenance fees (comisión por manejo de cuenta): Monthly charges for keeping your account open, typically ranging from 50 to 200 pesos per month for accounts that do not meet minimum balance requirements.
• ATM fees: Using another bank’s ATM can cost 25 to 50 pesos per transaction. Even your own bank may charge for exceeding a certain number of withdrawals.
• Transfer fees: While SPEI transfers are often free or very low cost from digital channels, in-branch transfers or international wires carry significant fees.
• Card replacement fees: Losing your debit or credit card typically costs 100 to 300 pesos for a replacement.
• Account statement fees: Requesting paper statements or historical records often incurs charges.
• Early loan repayment penalties: Some loans charge a fee if you pay them off before the agreed term.

Insurance and Investment Products

Banks earn commissions by selling insurance policies (life, auto, home) and investment products (mutual funds, retirement plans) to their customers. When your banker suggests adding insurance to your credit card or opening an investment account, the bank earns a commission.

Foreign Exchange

Banks profit from the difference between the exchange rate they offer customers and the rate at which they acquire foreign currency. If you have ever exchanged dollars at a Mexican bank, you likely noticed the bank’s buying price is lower and selling price is higher than the interbank rate.

Fractional Reserve Banking: Where Your Money Actually Goes

One of the most important — and least understood — aspects of banking is fractional reserve banking. When you deposit 10,000 pesos in your bank account, the bank does not lock those 10,000 pesos in a vault with your name on them. Instead, it keeps a fraction in reserve (to handle daily withdrawals) and lends out the rest.

This is not a secret or a scam. It is how banking has worked for centuries and is regulated by central banks worldwide. In Mexico, Banxico sets reserve requirements that determine how much banks must keep on hand.

Here is what happens with your 10,000-peso deposit in simplified terms:

1. You deposit 10,000 pesos at BBVA.
2. BBVA keeps approximately 1,000 pesos in reserve (the exact ratio varies).
3. BBVA lends 9,000 pesos to another customer for a car loan.
4. That customer uses the 9,000 pesos to buy a car. The dealer deposits the 9,000 pesos at Banorte.
5. Banorte keeps 900 pesos in reserve and lends out 8,100 pesos.
6. This cycle continues, and through this “money multiplier” effect, your original 10,000 pesos can support up to 100,000 pesos in total deposits across the banking system.

This is how banks “create money” — not by printing bills, but by lending deposits in a cascading chain. It is also why bank runs (when all depositors try to withdraw simultaneously) are dangerous: the bank literally does not have everyone’s money on hand at the same time.

Types of Banks in Mexico

Not all banks serve the same purpose. The Mexican financial system includes several categories:

Commercial Banks (Bancos Comerciales)

These are the banks most people interact with daily. They accept deposits, make loans, issue credit cards, and provide payment services. Mexico’s commercial banking sector is dominated by a handful of large institutions:

• BBVA México: The largest bank in Mexico by assets, owned by Spanish banking group BBVA. Known for its extensive branch and ATM network.
• Banorte: The largest Mexican-owned bank. Strong in mortgage lending and has aggressively expanded its digital offerings.
• Citibanamex: Owned by Citigroup (though undergoing a sale process). One of the oldest banking brands in Mexico, tracing its roots to Banamex, founded in 1884.
• Santander México: Part of the Spanish Santander group. Significant player in corporate and consumer banking.
• HSBC México: Part of the global HSBC group. Has reduced its branch footprint in recent years while focusing on digital services.
• Scotiabank México: Part of the Canadian Bank of Nova Scotia. Particularly active in auto lending.

Development Banks (Banca de Desarrollo)

Government-owned banks that serve specific policy objectives rather than maximizing profit. Key ones include:

• Nacional Financiera (Nafin): Supports small and medium businesses with credit and guarantees.
• Banobras: Finances infrastructure and public works projects.
• Sociedad Hipotecaria Federal (SHF): Promotes housing finance and mortgage markets.

Fintech Companies

Since Mexico’s Fintech Law (Ley Fintech) passed in 2018, a growing number of technology-driven financial companies have entered the market. While not all are technically banks, many offer bank-like services:

• Nu México (formerly Nubank): Digital bank offering credit cards and savings accounts with no commissions.
• Mercado Pago: Payment platform linked to Mercado Libre, offering a digital account and debit card.
• Stori: Digital credit card focused on people with limited credit history.
• Klar: Digital banking platform offering credit cards with no annual fee.
• Hey Banco (by Banregio): A digital-first banking experience backed by a traditional bank.

These fintechs have forced traditional banks to lower fees, improve digital experiences, and compete more aggressively for customers — a positive development for consumers. We cover these neobanks and digital banking options in detail in a later lesson.

What Is CAT and Why It Matters

When comparing financial products in Mexico, the most important number to look at is the CAT (Costo Anual Total, or Total Annual Cost). The CAT is a standardized measure that includes not just the interest rate but also all commissions, fees, insurance, and other charges associated with a product.

Two credit cards might both advertise a 30% annual interest rate, but one might have an annual fee of 1,500 pesos plus mandatory insurance, while the other has no annual fee. Their CATs would be very different, and the CAT gives you the true comparison.

By law, all banks and financial institutions in Mexico must display the CAT prominently in their advertising and contracts. It is expressed as a percentage and calculated using a formula established by Banxico. When shopping for loans, credit cards, or mortgages, always compare the CAT, not just the advertised interest rate.

A credit card with a CAT of 80% is significantly more expensive than one with a CAT of 40%, even if their nominal interest rates appear similar. The CAT captures all the hidden costs that banks might not emphasize in their marketing.

Bank Fees You Should Watch Out For

Bank fees in Mexico can silently drain your account if you are not paying attention. Here are the most common ones and how to minimize them:

Minimum balance fees. Many accounts charge a monthly fee if your balance drops below a certain threshold (often 3,000 to 10,000 pesos). Solution: choose an account that matches your actual balance, or use a digital bank with no minimum.

Out-of-network ATM fees. Withdrawing from another bank’s ATM costs money — sometimes from both your bank and the ATM owner. Solution: use your own bank’s ATMs, get cash back at stores, or use a fintech that reimburses ATM fees.

Inactivity fees. If you do not use your account for several months, some banks charge inactivity fees. Solution: set up at least one small automatic transaction to keep the account active, or close accounts you no longer need.

Paper statement fees. Requesting physical statements can cost 50 to 100 pesos each. Solution: switch to digital statements (estados de cuenta electrónicos), which are free and better for the environment.

Foreign transaction fees. Using your Mexican card abroad or for purchases in foreign currency typically incurs a fee of 1 to 3% on top of the exchange rate. Solution: check your bank’s foreign transaction policy before traveling, or use cards that waive this fee.

Overdraft fees. Spending more than your balance (if the bank allows it) triggers overdraft charges that can be surprisingly steep. Solution: set up balance alerts on your banking app and never spend more than you have.

Why Banks Are Regulated

Banks hold a special position in the economy. They manage people’s life savings, they create money through lending, and their failure can trigger economic crises. This is why they face heavy regulation.

In Mexico, the primary banking regulator is the CNBV (Comisión Nacional Bancaria y de Valores), which supervises all banks and financial institutions to ensure they operate safely and fairly. Banks must maintain minimum capital levels, follow lending rules, report their finances regularly, and submit to audits.

What Happens If a Bank Fails: IPAB

The fear of losing your savings in a bank failure is natural but largely addressed by the IPAB (Instituto para la Protección al Ahorro Bancario), Mexico’s deposit insurance agency. IPAB guarantees deposits up to 400,000 UDIs (Unidades de Inversión, an inflation-adjusted unit) per person per institution. As of early 2026, this is equivalent to roughly 3.2 million pesos — more than enough to cover the savings of the vast majority of Mexicans.

This means that even if your bank goes bankrupt, you will get your insured deposits back. However, IPAB protection only applies to deposit accounts (savings, checking, and certain term deposits). It does not cover investments, mutual funds, or products where you assumed market risk.

Understanding IPAB coverage is important for deciding where to put your money. If you have more than the IPAB limit, it is wise to spread your deposits across multiple institutions. When you are ready to choose, our lesson on bank account types walks you through each option.

Key Takeaways

• Banks are intermediaries that connect savers with borrowers, profiting from the spread between deposit rates and loan rates.
• Your deposits are not sitting in a vault — they are lent out under the fractional reserve system, which is regulated and insured.
• Mexico’s banking sector includes commercial banks (BBVA, Banorte, Citibanamex, Santander), development banks, and a growing fintech sector.
• Always compare financial products using CAT, not just advertised interest rates.
• Bank fees can significantly erode your money — understand your account’s fee structure and choose accordingly.
• IPAB insures your deposits up to 400,000 UDIs (approximately 3.2 million pesos) per institution.

In the previous lesson, you learned what money is and how inflation works. In the next lesson, you will explore the regulatory structure that keeps Mexico’s financial system stable and protects your rights as a consumer.