April 6, 2022
Banks are often associated with the institutions that hold your checking and savings accounts. However, there are various types of banks that serve different functions.
Each of these banks is likely to play some role in your daily life, even if you have never heard of them. There are various bank specializations, which makes sense since your bank should be putting its best efforts into serving you and your community. In the same way, online banks aren’t burdened with the expense of managing multiple branches.
Various types of banks
We’ve listed the most popular banks below, but it’s not always clear where the lines divide.
You probably have the most familiarity with retail banks. Consumers (or the general public) are often the customers of retail banks, where you typically keep a checking account and savings account. The banks have many branch offices in populated areas, and they offer loans and credit cards.
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Commercial banks focus on business customers. Every business needs a checking account just like individuals do. Additionally, the dollar amounts (and the number of transactions) may be big, and they need complex services. In addition to managing payments, commercial banks provide credit lines to manage cash flow and serve multinational companies with foreign exchange services.
The purpose of investment banks is to help increase value in the financial market. A company uses an investment bank when it wants to sell debt or go public. Also, these kinds of banks offer merger and acquisition advice to corporations.
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The services provided by private banks are generally exclusive to wealthy individuals with a net worth of at least $1 million. By establishing trusts, they assist clients in avoiding taxes on money left to their descendants.
Central banks are here to help the government with all of their financial needs. As an example, the Federal Reserve is the central bank of the U.S., whose mission is to supervise banks and set monetary policy in order to control inflation, reduce unemployment, and maintain moderate lending rates.
Credit unions are similar to banks, but they are not-for-profit organizations owned by their customers. (Investors own most banks.) Credit unions offer products and services more or less identical to retail banks. The main difference is that credit union members share some characteristics in common—where they live, their occupation, or an organization they belong to, for example.
There are no physical branches or personal bankers at online banks; they operate entirely online. In addition to offering online services, brick-and-mortar banks often offer online account viewing and bill paying, but internet-only banks are different from the rest. Savings accounts with Internet banks typically offer competitive rates, and they often include free checking as well.
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Like credit unions, mutual banks are owned by members (or customers) rather than outside investors. Their activities usually cover only a single community, as do credit unions.
Savings and Loans
Savings and loans were once common, but they are less prevalent now. Saving deposits from customers funded home loans are made possible by this type of bank. Saving and loans are derived from that core business activity.
Other Sources of Credit Include Non-Bank Lenders
Lending from non-bank lenders is becoming more popular. They’re not banks technically, but you might find them to be similar in terms of how they operate. Taking out a loan and repaying it is the same as working with a bank.
Most consumers find nonbank lenders attractive when shopping for loans. In addition to offering competitive rates, they may have different approval criteria than traditional banks. An example of these marketplace lenders is peer-to-peer lending, which can be a good option for people with bad credit or good credit.
They offer a wide range of products, but personal loans are their primary product. There are many reasons to borrow money, including education, home purchases, or refinancing.