Did you know that 7.1 million US households still do not have a bank account? Many people may shy away from using financial institutions, but this means failing to benefit from their many advantages. But do you know how to find the one that is right for you?
From central banks to credit unions, we can help explain them. Read on for our guide on the types of banks you need to know.
Central banks are unlikely to be used for general day-to-day banking. They don’t offer loans and checking accounts like most institutions, as they serve a governmental role. However, it is important to know about the part they play in the banking sector.
Responsible for conducting monetary policy, it is the central bank that will decide upon interest rates, protecting consumers, overseeing payments systems, and regulating banks. Therefore, they have a huge influence over the other financial institutions you will be choosing.
These banks are the ones aimed at consumers, meaning most people will have dealt with one or two before. They offer savings accounts, checking accounts and loans. They can be broken down into two category types.
Local banks are focused on a community. They typically have fewer assets than larger banks, often less than $1 billion. While they will also offer fewer services and choices, they will have a more customer-centric service and can offer alternatives to people turned down by larger banks.
National banks are the most well-known financial institutions. They are the chain banks that you see in every town and often across the world. National banks will offer almost any kind of service you would need, from business loans to standard accounts.
Commercial banks will offer the same services as retail banks. However, they tend to focus more on small businesses.
They work by accepting deposits and using the money to fund loans. The bank will then make money on the interest it charges. All deposits and savings are insured by the Federal Deposit Insurance Corporation, making it an attractive proposition for many.
However, the downside is they often pay very little interest out, if any at all. This is why given the choice, most general customers are better off with a retail bank.
Investment banks concentrate on business transactions for large institutions. They put in place mergers and acquisitions, raise money for expansion, give advice on debt and equity offerings, and many other services for large corporations. You would only tend to use them if you had a large organization, like a publicly traded company.
A cooperative bank can operate as either a retail or commercial bank. They differ from both in that they are owned and managed by their own members. They work to provide banking services to communities that may not have access to the larger banks.
To use cooperative banks, you have to be a member. Whereas most banks would use the interest earned from loans as profit for shareholders, cooperative banks use it to redistribute loans. Therefore you can often get much more favorable terms and conditions than you would in other banks.
Credit unions are the most popular type of cooperative bank that you would find in the US. They offer the same types of services that you would find in other banks. However, like all cooperatives, they do not work to make a profit.
Members of the union all have a common link. For example, they may live in the same community, go to the same church, or work in the same industry. For example, the Farmers Bank is a credit union that works for those in agriculture in the Idaho area.
Online banks will offer the highest interest rates. This is because they don’t have the upkeep of physical brick-and-mortar premises to work from. If you do most of your banking digitally anyway, they may be a great option.
The downside is that you often don’t have a place to visit. This can be troublesome when you want to make cash deposits. You may also need to check how secure the institution is compared to established, physical banks.
Customer service can also be an issue. Make sure you choose a bank with 24-hour telephone access at reasonable rates.
Savings and Loan Associations
In terms of financial institutions, savings and loan associations are not technically banks. They are concerned with property and home buying. Money deposited by customers goes into mortgages and loans for home renovations.
Often referred to as S&Ls and Thrifts, they allow people to earn more saving interest than they could get at a commercial bank. Some of them are so large they are even listed as publicly traded companies.
Shadow banks deal with assets and credit in much the same way normal banks would do. However, they do not comply with the rules and regulations other banks have. Instead, they work by making their own funds, connecting with investors, or borrowing them, so do not have to use money issued by the central bank.
Shadow banks have garnered quite a reputation in the last ten years. Organizations such as hedge funds and money market funds can take larger risks as they are not regulated. This has led to a number of times when they have been blamed for causing major financial crises.
Types of Banks
Once you know the types of banks that are right for you, then you need to find the right company. One organization can offer very different deals and rates from others. Make sure you shop around to see what is right for you.
If you enjoyed this article, we have many more to help. From savings to investments, we can help get the most from your money in the coming years!