Many people think of "the bank" as a place to keep money or other liquid financial resources, perhaps in a money market, checking, or savings account. However, there are many different types of banks and financial institutions, and depending on the type, they may offer many other bank services in addition to simple accounts.
Many people have a personal checking or savings account at a commercial bank. The commercial bank's primary business involves taking in financial assets through customer deposits and then lending these assets to other customers at a rate of interest.
Commercial banks make money by lending the collected funds out at a higher interest rate than the rate they pay to the deposit account holders. They also make money through fees charged to individual accounts.
The interest rate the bank charges on loans and revolving lines of credit (or other types of credit) will depend on current interest rates.
A consumer bank, such as a credit union or savings bank, may focus on the personal banking needs of a specific group or industry. The idea behind these banks is that by doing business with them, you're supporting that specific group or industry.
Credit unions offer many of the same services that commercial banks offer, including checking accounts, savings accounts, mortgages and other loans, and credit cards.
Private banks, meanwhile, cater to the needs of high-net-worth people and their businesses. These needs can differ from the needs of most consumers.
Private bank clients must usually prove a certain minimum net worth to obtain private banking services.
Private bank services include tax, estate, and philanthropic gift planning.
Investment banks connect investors with businesses. For example, an investment bank can work with businesses to sell bonds, which are basically loans to a business from investors at a specific rate of interest. The investment bank is the middleman, distributing the bond issue from the company to the customers.
The investment bank may choose to distribute publicly traded bonds to clients or they may arrange a private placement of the client company's debt directly with another company.
The bank prices the debt according to the current interest rate yield curve and the company's credit rating. When a company has a higher credit rating, it needs to pay less to sell bonds in the public or private markets.
Investment banks also raise capital for client companies by arranging equity issues, which are commonly known as stock. Investment banks receive fees from clients to raise capital, and many investment banks employ professional sales and marketing teams to distribute clients' debt and equity issues.
Finally, investment banks help clients to restructure debt loans. In some instances, the bank creates new investment strategies or uses a client's other financial assets as collateral for debts. Investment banks also may use what are called derivative instruments—which include options, futures, and swaps—to help clients achieve their financial goals.
How Customers Use Banks
Customers use banks to keep their financial resources safe and readily available for use. Deposits made by customers of the bank are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000, which helps customers avoid losses if a bank fails. People rely on banks' ability to pay them their money when they ask for it.
Banks allow customers to pay a financial obligation by writing a check on the bank account. The banks involved then handle the transaction, facilitating the transfer of funds to the payee.
Banks also provide debit cards to their customers, which allows them to access money without having to write a check or make a cash withdrawal. Debit cards also make it easy to withdraw cash at an ATM.
Types of Loans from Banks
There are many different types of loans available from banks.
For example, you could get overdraft protection for your checking account. In most cases, if you withdraw more money than is in the account, the bank charges you a fee. But overdraft protection, which usually comes in the form of a loan that's accessed when you overdraw the account, can protect against those fees.
Banks also lend money to private and business customers. These loans take the form of personal loans, commercial or business loans, and home or property loans (mortgages).
Banks also issue credit cards, which is another form of loan or line of credit. The bank supports its credit card business by charging fees for processing payments to settle customer credit card bills. To support merchants accepting customers’ credit cards, banks may offer a merchant network service. Merchant network services include card terminals or credit card machines.
More Financial Services from Banks
Other financial services that banks offer include helping customers move money via wire and electronic transfers. They can do this by using an interbank network to transfer funds to clients.
You can also get a cashier's check at a bank. That's when the bank guarantees a check so that the customer can offer it as certified available funds to a payee. The bank takes the money out of your account ahead of time, which guarantees the payee that the check will clear.
Lastly, banks offer the services of a notary public to validate clients’ important documents.