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Banks serve a variety of functions besides offering checking and savings accounts and granting loans. Their customers include everyone from individual consumers and small businesses to governments and global corporations.
Here is a look at various types of banks and their functions, so that you can know what to look for in a bank and decide which one is right for you.
Retail banks offer checking and savings accounts, as well as mortgages and other loans to the public. Often referred to as “traditional” or “consumer” banks, retail banks also offer investment products like certificates of deposit (CDs) and individual retirement accounts (IRAs).
Some retail banks offer credit cards and wealth management services for customers with a high net worth. A retail bank can be a small, local bank or it can be a division of a banking giant like JPMorgan Chase.
Retail banks are often insured by the Federal Deposit Insurance Corp. (FDIC). FDIC insurance protects customer deposits if a bank fails.
Brick-and-mortar banks are those that operate branches. Bank of America, Chase and Wells Fargo are examples of large, traditional banks with thousands of branches scattered around the country.
Many brick-and-mortar banks also have developed sophisticated websites and digital tools, giving customers the option of banking online or branch banking.
Online banks are digital financial institutions without brick-and-mortar branches. They are sometimes called “internet banks” because all transactions, such as paying bills, are conducted online from the bank’s website or using its mobile app.
Customers of online banks must have a computer or smartphone and a secure internet connection. Online banks issue debit cards for making purchases and cash withdrawals, and they often use ATM networks such as Allpoint or MoneyPass.
Discover Bank and Ally Bank are two of the most well-known and reputable online banks. Check out Bankrate’s picks for the best online banks.
Neobanks are financial technology companies, or “fintechs,” which offer digital banking services through a mobile app or website. Sometimes called “challenger banks,” neobanks do not have branches. They typically offer checking and savings accounts and often have digital tools to help customers budget and save money.
Neobanks tend to charge very low fees or none at all. Not all neobanks are chartered, meaning they do not operate under the supervision of a state or federal government. However, some neobanks partner with chartered, federally insured banks.
Chime and Varo Bank are examples of popular neobanks. Chime partners with two nationally chartered, FDIC-insured banks, and Varo Bank is nationally chartered and a member of the FDIC.
Commercial banks serve businesses and governments. They provide accounts that allow complex entities to manage their money and conduct their operations, and they offer loans for commercial real estate, equipment and other necessities.
Many large commercial banks, such as JPMorgan and Bank of America, also have consumer divisions that offer personal banking products.
Investment banks’ clients are typically large corporations and governments. Investment banks manage investments for large pension funds, handle stock and bond issues to help their clients raise money, and handle initial public offerings (IPOs) and mergers and acquisitions, among other things.
Some investment banks, such as Goldman Sachs, also have consumer banking divisions.
The central bank
The Federal Reserve System is the “central bank” of the United States. The central bank has a responsibility to promote the smooth operation of the nation’s economy, in the interest of the general public.
The Fed has five main functions:
- Conduct monetary policy to promote employment and stable prices.
- Promote the stability of the financial system and minimize risks.
- Promote the safety and soundness of individual financial institutions.
- Foster the safety and efficiency of payment systems.
- Protect consumers and promote community development.
The Fed has tremendous sway over the economy. For example, when it raises or lowers interest rates, banks act accordingly. This impacts the cost of mortgages, credit cards and other loans, as well as yields on consumer deposit accounts, such as savings accounts and certificates of deposit.
Alternative financial institutions
Unlike banks, credit unions are not-for-profit institutions that are owned by their members. Like banks, they take deposits, make loans and provide a range of other financial services.
Credit union profits are returned to their members by way of lower fees, higher yields on savings accounts and cheaper loans.
You must be a member of a credit union to use its products, and each credit union has its own membership criteria, often based on a shared interest such as working for the same company or being in a particular occupation. Members’ families typically are eligible to join. Sometimes, membership is as easy as making a $5 deposit to open a savings account.
Community Development Financial Institutions (CDFI)
A CDFI provides financial products and services and investment capital to individuals and businesses in low-income communities. Banks, credit unions, venture capital funds and other public and private financial entities that invest in revitalizing neighborhoods can be CDFIs.
CDFIs collaborate as a nationwide network to help people buy homes, start businesses and invest in schools, health centers and other projects in underserved communities. There are at least 1,000 CDFIs operating in the country.
Organizations must be certified as a CDFI. The fund is part of the U.S. Department of the Treasury.
Savings and loan associations
Savings and loan associations focus on real estate loans, especially for single-family homes and other residential properties. Originally known as “thrifts” because they offered only savings products, savings and loans have expanded over the decades into other consumer and business products, such as checking accounts and mortgages.
Thrifts can be owned by their shareholders and depositors, or just shareholders. The S&L crisis of the late 1980s and early 1990s shuttered many of these institutions or forced them to merge with other banks.
What to look for in a bank
Your needs and financial goals should guide you in choosing a bank. If you’re a consumer who wants just a basic checking account and direct deposit, your search criteria will be different from someone who needs the right accounts and services for running a business.
You can refine your search by considering the pros and cons of banks vs. credit unions. Some other factors to consider when shopping for a bank include:
- Fees and other charges. Many of the best banks do not charge hefty fees, or they charge none at all.
- Interest rates. If you’re a saver, you’ll want a bank that pays a decent yield on deposits. If you’re looking to take out a loan, you’ll want a lender that charges lower rates.
- Digital banking tools. If you want access to online and mobile banking, check out the bank’s website and digital tools, and read the reviews of its mobile app.
- Branch locations. If you prefer branch banking or a combination of online and branch banking, find out how many branches the bank has and whether there is one near you.
- ATM access. Make sure the bank has enough ATMs to meet your needs or is linked to an ATM network, such as MoneyPass. Otherwise, you may pay high fees to use another bank’s ATMs.
- Menu of products and services. If you prefer a one-stop shop that has everything, check out banks with a broad range of products and services.
- Customer service. Not being able to get answers or the help you need when you need it can be frustrating. Check the bank’s customer service hours, look over its FAQs and find out whether it offers live chats online.
- Insurance. Savers should make sure the bank is federally insured, either by the FDIC or the National Credit Union Association’s Share Insurance Fund. If the bank or credit union fails, your deposits are insured up to $250,000.
Finding a bank that’s the right fit for you doesn’t have to be difficult. The first step is to know what you need. Don’t be afraid of online banks. They are often federally insured just like traditional brick-and-mortar banks.
Don’t assume that a traditional bank will be behind the times with digital banking, because many big banks have very sophisticated, secure and user-friendly online and mobile banking tools. And don’t assume that a giant commercial or investment bank can’t help you because many of them have consumer banking divisions with all the products and services of retail banks.
In the vast financial landscape, there is a bank out there that’s right for you.