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.

 

Should Banks Charge Separate Fee for ATM Withdrawals?

So far banks in India do not charge us for withdrawing money from their ATM machines. And if we some other bank’s ATM machine, we can withdraw without any fee up to 5 times a month. But now there is a proposal by banks to charge customers separately for withdrawing money from ATM. Here is a news article about the same: 

http://www.rediff.com/business/report/be-ready-to-pay-more-for-atm-transactions-this-year/20140102.htm

So far no bank has said that it is actually going to charge. We are yet to know if banks are actually going to charge us. I think they should not charge separately because of following reasons: 

1. ATM transactions are part of the banking service and ATMs are now integral part of banking system. So banks should not charge separately for withdrawing money from ATMs. 

2. If my bank charges me for ATM withdrawals, I will stop using their ATM and will simply go to the nearest branch and withdraw my expected monthly expenses – may be once a month. It will crowd their branch and hence bank employees won’t get time to solicit us to sell some lucrative investment proposals! 

3. Situation of more crowded bank branches will need banks to go for more floor space and bigger office space which means more expense; and also need to hire more employees on teller counters. This is against their business model. 

4. Net deposit with banks will reduce since people will start withdrawing in higher amounts to avoid multiple withdrawals at ATMs, so banks will lose net deposits.  

Therefore I think it is loss making proposal for banks to charge separately for ATM withdrawals and they should not go for it… We already have proposals for no-frills ATMs or unbranded ATMS which will be run not by banks but by third parties for all banks in single ATM; with unique revenue model; I think that is the best way out in the future since it is a win-win model for both banks and the customers.