O'Banion was raised in the Little Hell district of Chicago's North Side. He was a choir boy at Holy Name Cathedral by day and a street moper by night in the concrete jungle of whorehouses and pubs. As he got older, he became a singing waiter in some of the dive bars on Eire and Clarke. As the customers listened to O'Banion's sentimental Irish ballads and the booze slowly got the better of them, Dion would pick their pockets. After the bars had shut, O'Banion prowled the streets looking for victims to mug.

He was arrested in 1909 and imprisoned for three months for robbery. He was imprisoned again in 1911 for concealed weapons charges. This was the last time O'Banion would do time. He quickly learned that money talked in Chicago and began lining the pockets of the North Side police and judiciary.

Dion moved on from street mugging to a form of sales promotion. He was hired by Maxie Annenberg, in charge of sales promotion for the Chicago Tribune, to strong arm vendors to carry the paper - and only that paper. O'Banion would later transfer his alliance to the Hearst newspaper group. It was whilst working for Hearst that he got into safe cracking, taught by one of the best professionals of the time, Charlie Reiser. He also learned that dead witnesses could not testify and convictions could not be made without good testimony.

When Prohibition eventually came, O'Banion was the leader of a large and powerful gang called the North Siders. Members of the gang included Hymie Weiss and George 'Bugs' Moran. O'Banion's approach to Prohibition was to hijack the booze shipments coming into the area and stockpile it ready for delivery to the illegal speakeasies that were opening up all over the place. He was quoted as saying "Let Torrio make the stuff and I'll steal what I want of it." However, even a thief like O'Banion could not steal enough to keep up with the demand for booze so he had to take over some of the breweries in the area. But even with the breweries under his control, Dion could not give up the hijacking of John Torrio's illegal moonshine. His antics became a thorn in Torrio's side and gang warfare raged between the two sides.

Then O'Banion offered to sell Torrio the Seiben Brewery for half a million dollars and to retire from the gang life in Chicago. Torrio readily put up the money, anxious to be rid of O'Banion. As soon as the deal was closed and the money had changed hands, federal agents swooped down on the brewery, confiscating everything and charging Torrio with violations of the Prohibition laws. O'Banion had got wind of the federal action and had decided to put one over on Torrio in order to let the Italian take the loss. Torrio was furious at O'Banion and set about organizing a plan of retribution. The war between the two gangs became bloodier and more vicious.

O'Banion ran a flower shop on North State Street as a legitimate front. He got a kick out of supplying the floral arrangements for the numerous Mob funerals going on in Chicago at the time. Then in November of that year, a mobster called Mike Merlo died (of natural causes) and a request came into the shop for an arrangement for the funeral. The following morning three men turned up at O'Banion's shop to take delivery of the wreath. As O'Banion shook hands with one of the men, the other two pulled out pistols and shot him in each cheek, twice in the throat and twice in the right breast. O'Banion could not even pull his own guns since his gun hand was busy shaking the hand of Frankie Yale, a hired gun from New York. The shooters were Al Anselmi and John Scalise, two of Chicago's top gunners. All three were operating under orders for John Torrio.