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Banks make profit in various ways but typically what they are doing is taking smallish margins as middlemen on financial transactions of large volumes of money. They are also experts in risk assessment related to financial transactions.
A few examples from retail banking:
Currency exchange: Banks can exchange currency with very little cost due to their netting and aggregating individual transactions and acting with huge volumes. However for any currency exchange that their customers undertake the bank will charge a margin on the exchange rate at a much higher level than their costs.
Mortgage book: Banks use their expertise to assess the risks of customers borrowing to purchase houses and set the interest rate on the loan at a level such that any defaults are covered by the overall book. The interest rates on the loan also cover the cost of their capital which typically comes from deposits from other customers.
One of the reasons why cryptocurrency is interesting is the potential for individuals to disrupt these margins by interacting between themselves and without the middleman. The cryptocurrency provides the medium for these transactions and keeps them out of the infrastructure controlled by the banks.
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