Following the Money: How Financial Firms Earn

Imagine a hospital nurse in Columbus, Ohio. Call her Dana; she is invented, and her numbers are illustrative. Every other Friday her pay arrives in a checking account at a large bank. She buys groceries with the bank's debit card, puts most other spending on a rewards credit card from a different bank, and pays a 30-year fixed-rate mortgage on her house. She pays no monthly fee for the checking account, earns cash back on the credit card and sends one mortgage payment a month to a company she did not choose. To her, finance looks almost free.

It is not free. A dozen firms earn money from Dana's three products, and most of them never deal with her directly. This chapter follows her money through each product in turn, shows who earns what and why, and ends with a short list of the engines that pay for almost everything in finance. Appendix A works through four stylized examples that later chapters use: a bank hit by a rate shock (Chapters 1 and 5), a cohort of credit-card accounts (Chapter 10), an insurer's float (Chapter 8) and a card payment waterfall (Chapter 9).