Do Banks Earn Money from Net Banking Platform?

 

Have you ever wondered how banks earn, if they do, from your financial transactions on their net banking platform? For example, when we use their net-banking portal to pay bills or transfer money to other bank accounts using NEFT (which is known to be free), do banks earn any money?

I searched the internet sources and while one source gave a simple answer saying net banking is a feature and not a profit center for the banks, further searches told that there is more to the story. 

When you transfer money from Bank #1 (your savings account) to Bank #2 (another of your savings accounts) using NEFT via Bank #1’s NetBanking, Bank #1 does not earn money from your NEFT transaction. NEFT charges (if any) are regulated by the RBI, and banks have made NEFT free for savings account holders, especially after RBI waived processing charges for NEFT/RTGS in 2019. Even Bank #2 (Receiver) does not earn money. The receiving bank is obligated to credit the beneficiary account without charging any fee. The RBI mandates that beneficiaries should not be charged for receiving NEFT/RTGS payments.

So, who might earn (if anyone), from your free NEFT transactions? NPCI or RBI: These institutions operate the NEFT infrastructure and may charge nominal fees to banks, but not to customers.

Why do banks offer free NEFT and online transfers? Even though you don’t pay a fee, banks still have strategic incentives to offer and maintain these services:

1. Customer Retention & Engagement

- Offering free and seamless transfers keeps customers loyal.

- It encourages users to keep their primary banking relationship with that bank, which opens doors for cross-selling: - Credit cards, Loans, Investment products, Insurance, etc.

2. Cost Savings Over Branch Visits

- Digital transactions are far cheaper for banks than handling cash or in-person transactions.

- Encouraging online transfers reduces the load on physical branches and call centers, saving operational costs.

3. Data Monetization & Insights

- Banks gain valuable insights into your spending patterns, preferred merchants, and financial behavior.

- This data helps them: Offer personalized products, Improve risk profiling and target you with relevant offers

4. Float Income (Short-Term Interest)

- Even though NEFT is fast, there can be short settlement windows (especially on weekends or holidays). During this time, banks may earn interest on the funds before they’re credited to the recipient.

5. Regulatory Compliance & Brand Image

- The RBI mandates that NEFT and RTGS be made available 24x7 and encourages zero charges for savings accounts. Offering these services enhances a bank’s reputation and aligns with financial inclusion goals.

6. Indirect Revenue via Partnerships

- Some banks partner with payment gateways or aggregators (like BillDesk, Razorpay) and may earn small commissions on certain types of transactions (e.g., bill payments, recharges).

Bottom Line:

Even if banks don’t earn directly from your NEFT transaction, they benefit indirectly. And they also earn a sum in the form of float income (the interest banks earn on funds that are temporarily in their possession before being credited to the recipient).

- Rahul

Note: This article includes inputs from AI model.

 

What to Make of 99% Return of Old Demonetized Notes to the RBI

After recent announcement that approx. 99% of demonetized Rs 500/1000 notes have returned to the RBI, media is busy mentioning it as a failure of demonetization. That makes me rethink about how it all happened.

First, Modi addressed nation on the evening of 8th Nov, 2016, announcing demonetization. In his speech, he put equal emphasis on how demonetization would try to address problems of terror-funding, fake currency circulation, hawala trade, along with of course black money and corruption. If you remember the first most visible impact of demonetization, apart from of course the long queues and lots of trouble to the public, it was an abrupt halt on stone pelting in Kashmir. Why did stone pelting stop? Next, we read news and saw pictures and TV footages of how old currency notes were thrown away in rivers, ponds, sewage and some were also burnt, and at some places were also distributed to the poor by making a road-side stall.

Next, a lot of such old currencies were deposited in the Jan Dhan accounts of poor people. We have statistics: 2.26 Crore new Jan Dhan accounts were opened immediately after demonetization was announced and total deposits in them doubled to Rs 87000 Crores. Was govt angry at it and tried to stop it? No, Modi asked people in his humor to let rich people deposit money in the Jan Dhan accounts; but do not to let them withdraw it; thereby keeping the money as their own. If Modi did not want all this money to return to the RBI, would he say that?

So, from where did this theory come – that govt did not want all the demonetized old currencies to return to the RBI?

This theory, like a lot others which are circulating, happened thanks to our media and its “TV Experts”. Just next day after demonetization was announced, I heard a “TV Expert” say that after demonetization only 80% of old currencies would return to the RBI and hence RBI’s balance sheet would become stronger. From where did this guy get this “80%” figure? Along with share-market experts and weather forecasters, these “TV experts” are the new “astrologers”. Masquerading pure fiction as expert commentary and cooked figures as statistics, these TV experts hide their ignorance with good language skills and are making good bucks. So, this theory that 20% old notes won’t return to RBI was started by the media and it spread widely since it was “easy to understand”. And now that it did not happen, media is busy putting govt/RBI on the spot, while hiding its own bad job. But we know.

We know that just after announcing demonetization, govt had launched its new black money declaration scheme called “Pradhan Mantri Garib Kalyan Yojana” which meant that the govt wanted old currency notes to return to the banks. It just wanted those currencies to return through the right channel and to serve the right purpose. That is why old notes were allowed to be used to pay loan EMIs, to be used in govt shops, cooperative stores, petrol stations, pay utility bills, etc too. Using the Garib Kalyan Yojna, anyone could declare one’s unaccounted money, pay approx. 50% tax and keep the remaining. If govt. did not want old currencies to return to the RBI, why would it launch this black money declaration scheme? It seems govt. was looking at long term goals like increased tax compliance and strategic maneuvers like changing games for terror and hawala funding rather than short term benefits like not allowing old currencies back to the banks and improving RBI’s balance sheet.

In fact, this whole “idea” that govt. should just scrap old notes, prevent people from depositing back old notes, and thereby make gains for the RBI - is so “sinister”. Did media expect or want our govt. to play such “tricks” with the people?

It seems govt. and RBI had clear plans for demonetization and they went ahead with their execution; while the media kept making theories and conducting TV debates.

As such I do not support demonetization because it created lots of discomfort to the common people and I think it was not worth it because of that reason alone. But when media says that it was not worth it “since old notes returned to RBI” I find it a ridiculous idea.

- Rahul