When You Think Of A Bank, The First Thing That Comes To Mind Might Be The Institution That Holds Your Checking Or Savings Account. But There Are Several Different Types Of Banks, All Serving Different Needs.
You might not have heard of all of these banks, but each example probably plays some part in your everyday life. Different banks specialize in distinct areas, which makes sense you want your local bank to put everything they can into serving you and your community.
What is A Bank?
A bank is a financial institution with a license to hold and lend money. It can provide checking and savings accounts, credit cards, mortgages, auto loans, personal loans, small business loans, and more.
A bank can also offer services such as cashier’s checks, money orders, wire transfers, safe deposit boxes, currency exchange, and investing or wealth management. Banks can pick and choose what services they offer and in which states they operate.
There are several different kinds of banks including retail banks, commercial or corporate banks, and investment banks. In most countries, banks are regulated by the national government or central bank.
How Banks and the Banking Industry Work?
Banks, whether they be brick-and-mortar institutions or online-only, manage the flow of money between people and businesses. More specifically, banks offer deposit accounts that are secure places for people to keep their money. Banks use the money in deposit accounts to make loans to other people or businesses.
In return, the bank receives interest payments on those loans from borrowers. Part of that interest is then returned to the original deposit account holder in the form of interest—generally on a savings account, money market account, or CD account. Banks primarily make money from the interest on loans as well as the fees they charge their customers.
These fees can be tied to specific products, such as bank accounts, or related to financial services. For example, an investment bank that offers portfolio management to investors can charge a fee for that service. Or, a bank may collect an origination fee when granting a mortgage loan to a homebuyer.
Banking is a highly regulated industry. The Federal Reserve System oversees banks and other financial institutions and coordinates with state regulatory agencies to help ensure banks follow the proper guidelines. Banks are also subject to regulation by other federal agencies, including the Office of the Comptroller of the Currency (OCC), the Office of Thrift Supervision (OTS), and the Federal Deposit Insurance Corporation (FDIC).
The FDIC does many things, but one of the most important for banking customers is insuring deposits. The FDIC insures deposits at banks for up to $250,000 per depositor, per insured bank, for each account ownership category. This means if your bank fails for any reason, the FDIC can help you recover the money in your accounts, up to the allowed limits.
Types of Banks
Some of the most common banks are listed below, but the dividing lines are not always clear.
- Retail Banks
- Commercial Banks
- Investment Banks
- Credit Unions
- Private Banks
- Online Banks
- Savings and Loan Banks
- Neo banks
- Central Bank
- Micro-finance institutions
Many different types of banks and other financial institutions function differently, offer different services, and provide different benefits.
In this article, we are going to go over a wide assortment of different types of banks.
Understand Different Types of Banks
We’ll dive deep into each bank type, picking apart their pros and cons, analyzing their benefits and key functions.
Let’s get started.
1. Retail banks
Retail banks, also known as consumer banks, are commercial banks that offer consumer and personal banking services to the general public. Most retail banks offer checking accounts, savings accounts, and retirement accounts.
Consumer banking institutions may also offer different retail credit products to individuals and families, such as auto loans and credit cards. Institutions chartered as a community, regional or national banks can all offer retail banking services directly to consumers.
This type of bank can facilitate everything an individual would need from a financial institution, from daily transactions to personal loans and certain brokerage services.
Here are some of the services offered by retail banks:
- Bank Accounts: Retail banks are ideal for creating checking and savings accounts for individuals. Account minimums are relatively low, and so are the required initial deposits. There aren’t many fees associated with these accounts either, as long as you meet the account minimum balance and don’t overdraft.
- Loans: Retail banks are a popular destination for personal loans. Each bank will have different policies in terms of repayment and interest. You can also likely get auto loans and home equity loans depending on the bank and your credit history.
- Debit Cards: Debit cards are provided as a complimentary item with your bank account.
- Credit Cards: You can also apply to open a credit card for your bank account. The requirements for opening a line of credit depend on the bank and usually involve your account balance, deposit frequency, and credit history.
- Money orders and certified checks can also be made at retail banks.
- ATMs: All large retail banks will have ATM locations in most towns and cities. These ATMs are specifically designed for customers of that bank and carry no fees when transferring money through them.
- Wire Transfers: Money can be quickly transferred from one account to another within the same bank. These wire transfers are often completely free and will take effect instantly.
- Certificates of Deposit can also be issued from retail banks.
- Specialized Accounts: Lastly, retail banks are typically capable of making specialized accounts for different types of people. There are teen-checking accounts that can be opened with a parent, and there are specially designed accounts for college students as well.
- Notary services can also be facilitated through these banks.
Retail banks are ideal for those looking for a convenient personal banking solution.
Retail banks make it easy for consumers to open accounts, maintain them, and interact with their money.
2. Commercial banks
Some banks or departments within banks focus on serving corporate, nonprofit and government clients. These banks are often called business or commercial banks as a reference to their customer base. Often, commercial banks offer special financing and loan products for businesses, such as commercial real estate and equipment loans.
Commercial banks focus on business customers. Businesses need checking accounts just like individuals do. But they also need complex services, and the dollar amounts (and the number of transactions) can be substantial.
Commercial banks, which are also called business banks or corporate banks, manage payments for customers, provide lines of credit to manage cash flow, and offer foreign exchange services for companies that do business overseas.
The economic purpose of commercial banks is to create capital, credit, and foster liquidity in the market.
Here are some of the products and services offered by commercial banks:
- Various Loans: Commercial banks can provide many different types of loans for different purposes. These loans include business term loans, commercial lending options, refinancing, and commercial mortgages.
- Cash Management Services: Commercial banks have treasury management solutions ideal for larger businesses. These services include market liquidity assessment, cash flow management, and investment management.
- Various Credit Products: Different types of credit lines can be opened through commercial banks, many of them suited for business purposes.
- Equipment Lending: Commercial banks usually offer their customers’ equipment lending, leasing, or equipment financing. These are essentially loans those businesses can use to purchase necessary equipment. These equipment loans can be paid off through recurring monthly payments over a fixed period of time.
- Trade Finance: Commercial banks can significantly reduce the risk of international trade through trade financing. The bank can act as a third party that mediates any divergence between the exporter and importer.
- Commercial Real Estate: Commercial banks often own properties that can be leased to business tenants for conducting revenue-generating activities. These properties can range from a brick-and-mortar store to an entire shopping center. Most strip malls, retail stores, restaurants, and office spaces are likely to be owned by commercial banks.
- Foreign Exchange Services: Commercial banks support currency exchange and conversion. This coupled with trade finance makes commercial banks great for conducting international business.
- Notary services are also included.
For business purposes, both large and small can benefit greatly from banking through a commercial bank.
If a business needs to open an account, get a loan of any kind, access a line of credit, or convert funds for foreign markets, commercial banks are the way to go.
3. Investment banks
Instead of focusing on lending, investment banks make money through investing either their own money or a client’s money. For example, an investment bank may help clients with mergers and acquisitions, or help a private company go public through an initial public offering.
Investment banks help businesses raise capital in financial markets. If a company wants to go public or sell the debt to investors, it often uses an investment bank. This kind of bank also may advise corporations on mergers and acquisitions.
Here are some of the services you can expect to receive from an investment bank.
- Corporate Finance: Investment banks are known to facilitate corporate finance for their clients. Investment banks guide corporations through managing sources of funding, capital structuring, and making investment decisions.
- Merger & Acquisition Assistance: Investment banks walk firms through the process of mergers and acquisitions. These banks play a major role in the M&A process by advising the firms involved to maximize the returns earned from the action. Investment banks evaluate merger proposals and assist the firms in arranging the financing for the deal.
- Raising Capital: These banks raise money for their clients through facilitating initial public offerings (IPOs), issuing and selling bonds on behalf of the client, and the sale of company shares to investors via private placements.
- Equity Research: Investment banks often produce reports, perform analysis, and make recommendations to their clients as to whether they should buy, sell, or hold investments that they are contemplating.
- The sales and trading of stocks, bonds, and various securities.
- Asset Management: Investment banks manage their clients’ investments with the responsibility of appreciating the investment while mitigating risk. The bank will determine which investments should be made or avoided in the interest of building the portfolio of their clients.
4. Private Banks
Private banks provide services exclusively to wealthy clients, usually those with at least $1 million of net worth. They help clients manage their wealth, provide tax advice, and set up trusts to avoid taxes when leaving money to descendants.
The financial products and services provided by private banks carry fees, and there are account maintenance fees to be aware of. These fees, however, can be avoided by meeting a certain account minimum balance, which shifts from bank to bank.
Here are the services offered by private banks:
- Preferential Rates: The deposit accounts held with private banks enjoy higher APYs. Relative to other bank types, the fees charged by private banks could be lower. Additionally, private bankers could take advantage of preferential pricing on loans and mortgages.
- Comprehensive Financial Planning: Private banks often walk their customers through financial decisions. This financial counsel includes creating savings plans, analyzing the financial implications of major purchases, and so on.
- Investment Guidance: Private banks will also give investing advice to their customers, much like investment banks, private banks guide their customers on subjects like the sale and purchase of securities, stocks, and bonds, and asset allocation.
- Wealth Management: The broad umbrella of wealth management is included in the services of private banks. Everything from legal advice, estate planning, personal accounting, retirement planning, and tax guidance is provided to private bankers.
- Credit Services: Private bank customers can open lines of credit with their bank and enjoy lower rates compared to other bank types.
- Lending: Private banks also give out loans for their clients to ease the purchase of major luxury products or things like land, property, and so on.
Private banking is a highly advantageous and unique banking solution. Opening an account with a private bank opens the doors to myriad financial tools, products, and services. Private banks are essentially personal accountants and financial advisors that hold your money.
The catch is that you need to have enough cash to open an account and keep up with the account minimums. If you are a wealthy, high-net-worth individual, private banks are ideal for you thanks to the long list of benefits they provide
5. Online banks
Online banks operate entirely online; there are no physical branch locations available to visit with a teller or personal banker. Many brick-and-mortar banks also offer online services, such as the ability to view accounts and pay bills online, but internet-only banks are different. Internet banks often offer competitive rates on savings accounts, and they’re especially likely to offer free checking.
This type of bank is highly popular outside of the United States, particularly in east Asia. One of the most enticing features of mobile banking is completely contactless transactions.
You can use the app of the bank to read QR codes which will open a field through which you can purchase products. Convenience is the primary perk of mobile banking.
Here are a few more:
- Fewer and Lower Fees: Since internet-exclusive banks don’t need to pay for the expenses of physical locations, customers of these banks enjoy savings. There are fewer fees associated with these banks. Most online banks don’t charge minimum balance fees nor overdraft fees. Any fees that do exist are almost guaranteed to be lower than competitors.
- Credit Services: Lines of credit can be opened through mobile banks. These will also likely charge competitive rates and lower fees due to the overall inexpensive nature of online banking.
- Simplicity: These banks are very simple. Most of them only offer basic checking and savings accounts, and some offer credit programs.
- Universal Access: Your bank will never be out of reach and that includes customer service, which can be reached remotely at any time.
Overall, mobile banks are highly convenient banking solutions that are easy to use and won’t cost much to use.
The only issue to be found with these banks is how limited their services can be in the absence of physical locations
6. Credit unions
A credit union is a financial institution that’s cooperatively owned and run by its members. Like banks, these not-for-profit organizations also accept deposits and offer loans. But unlike banks, credit unions pass earnings on to members rather than shareholders.
You may find that credit unions offer fewer fees, lower interest rates on loans, and higher rates on your savings. Membership is often limited to people who have a link to the credit union, such as living or working in a particular area.
Credit unions charge much lower fees than other banks, making them ideal for lower-income individuals and businesses.
Here are the services that credit unions provide:
- Issuance of Loans: Credit unions are best known for providing personal loans and business loans. These are only available to the clientele demographics that they serve. The advantage of these loans is how cheap they are to take out. The fees and rates are very favorable from credit unions. These loans range from auto loans to mortgage loans.
- Accounts: Customers of credit unions can open savings and checking accounts with their affiliated branches. Once again, the cost of banking through the union is low, as the account minimums and required fees will be low to non-existent.
- Credit Cards: Affiliates of credit unions can open lines of credit through the institution.
- ATM Services: Credit unions also feature ATM services, which are ideal for those who don’t qualify for debit cards and need access to their cash.
- Student Loans: Credit unions often dispense student loans with flexible repayment plans at relatively lower interest rates.
- Retirement Savings Accounts for qualifying elderly customers that are looking for a place to save their money.
- Secured Loans and Lines of Credit: Loans and credit cards for those with lower credit scores. This service serves as an opportunity for those with a poor credit history to rebuild their credit.
- Notary services can be carried out through a credit union.
Credit unions offer a host of great banking solutions for those who qualify for them.
There are some caveats when it comes to the services that credit unions offer, however.
The factors that affect the availability of credit unions include:
- The community served
- The demand for available services
- The current number of members at the credit union
- The goals of the controlling board
Credit unions are controlled by an elected board of directors pulled from their member pool.
This means that credit unions can differ in policy dramatically based on the composition of the board.
7. Savings and loan associations
Savings and loan associations, also known as thrifts, are a type of financial institution that focuses on helping people become homeowners. Unlike banks, which are solely owned by shareholders, customers and shareholders can mutually own a thrift.
Historically, there were limitations on the types of products a thrift could offer. Today, you may find that thrifts and banks offer similar types of consumer accounts. But federal laws have traditionally limited the types of commercial accounts and business loans they may participate in. Today, there aren’t nearly as many thrifts as banks, partially due to their decline following the S&L crisis in the 1980s.
Here are the services you can expect from a savings and loan association:
- Accounts: You can open checking and savings accounts through savings and loan associations.
- Loans: Thrifts offer a wide variety of loans, and most of them are home and property-related
These are simpler institutions that are locality-oriented and encourage people to buy homes in certain areas.
8. Neo banks
Neo banks is a new type of bank in which smaller, digital platforms perform the same services as retail banks, just without the retail presence. Being completely online, these banks have low overhead and are therefore more likely to offer better features to customers that typical bank won’t offer.
This would include things like foreign exchange services, a multi-currency account, and more. While Retail banks would offer these services too, only their top-tier clients are privy to these benefits. With Neo banks, every account is treated equally.
The interesting thing about Neo banks is that a lot of them are not actually banks. They will hold your money in a segregated account held by a real banking institution but the money is not loaned. Instead, a small transaction fee or account fee is charged instead of the loan business.
9. Central banks
Central banks are the principal monetary authority of a country (or, occasionally, a group of countries) and are crucial to the functioning of all banks, financial markets, and the economy.
Central banks manage the amount of money and credit in an economy usually in an effort to contain inflation rates and/or to foster economic growth. They typically accomplish this through their daily activities of buying and selling government debt, determining and maintaining core interest rates, setting reserve requirement levels, and issuing currency.
Some central banks are also charged with maintaining certain foreign exchange rate levels for the home currency. Central banks also arrange payments between banks. Central banks manage the monetary system for a government.
For example, the Federal Reserve is the U.S. central bank responsible for supervising banks and setting monetary policy to control inflation, reduce unemployment, and provide for moderate lending rates.
10. Micro-finance Institutions
Micro-finance institutions (MFIs) exist to extend small amounts of money to low-income customers, usually in developing countries. The amounts lent can be as little as USD 20, though they can sometimes reach a few thousand dollars.
The purpose of these loans is to enable customers to rise out of poverty and become more economically self-reliant, for example by buying materials with which to manufacture simple goods that can then be sold in a local marketplace.
MFIs often try to replace unscrupulous lenders that exploit customers and charge exorbitant rates of interest. Much MFI activity is directed at women.
The most famous example of an MFI is Grameen Bank, which was set up in Bangladesh in the 1970s to lend money to poor people in small villages. Grameen has since become a large institution, though it retains its strategy of making small loans to underprivileged, largely rural borrowers.
Micro-finance lending now occupies a central position in economic development programs worldwide, with significant networks in South America, Asia, and sub-Saharan Africa. Some large commercial banks provide funding to MFIs as part of their corporate responsibility programs or even as part of their regular lending programs.