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The Revenue Myth: Banks and Deposits

Problem Statement:

1 million Swedish users subscribed to Spotify for $1 each, and this $1 was deposited in J.P. Morgan on the same day. Spotify’s revenue from this is $1 million. The question is: What is J.P. Morgan’s revenue from this deposit? Options: More than 1.5 Billion, 1.5 Billion, Less than 1.5 Billion, Negligible.

Solution:

J.P. Morgan, like other banks, earns revenue primarily through services such as loan interest, investment services, fees, and trading activities. Simply receiving deposits doesn’t directly contribute to a bank’s revenue, as the bank does not "earn" from holding the deposit itself. Deposits are typically used to fund other activities (e.g., issuing loans), which generate revenue.


In this case, the $1 million deposit is just a liability on the bank’s balance sheet and does not directly generate income for J.P. Morgan. Hence, the revenue from this specific deposit would be negligible for the bank.

The problem highlights a common misconception about how banks generate revenue. It questions whether deposits directly contribute to Bank's income. This emphasizes the importance of understanding different business revenue models across industries.

Applications in Other Industries

Many industries face similar misunderstandings about how they generate revenue. Payment aggregators, credit card companies, investment platforms, and e-wallets all rely on fees, not on deposits though the deposits are an important factor.

Payment Aggregators (e.g. PayPal, Razorpay): When users deposit funds into their accounts, the deposit itself doesn’t count as revenue. The revenue is generated from transaction fees and currency conversions.
Credit Card Companies(Amex, OneCard): The money users spend using credit cards doesn’t directly contribute to the company's revenue. Their revenue primarily comes from interest charges on unpaid balances and merchant fees.
Investment Platforms(Fidelity Investments, Zerodha): Simply holding assets on behalf of customers (e.g., in a brokerage account) doesn’t create revenue. Revenue comes from fees on transactions, account management, or advisory services.
E-wallets (e.g., Google Pay, PhonePe): The money added to a user’s wallet is not considered revenue. The platform earns through transaction fees and partnerships.

Takeaway

Revenue is defined differently across industries, depending on how value is generated. In the case of a bank, deposits themselves are not a source of direct revenue, unlike loan interest or service fees. For platforms and services like payment aggregators, credit card companies, or investment platforms, revenue is tied to the services provided and fees charged, not merely the movement or holding of money. Understanding how a business defines and generates revenue is crucial to evaluating its financial health and profitability.

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