Get Up to Speed on the Most Common Types of Banks
What Are the Different Types of Banks?
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. Likewise, online banks can do their thing without the overhead of managing multiple branch locations.
Types of Banks
Some of the most common banks are listed below, but the dividing lines are not always clear.
Some banks provide services in multiple areas. For example, a bank might offer personal accounts to consumers, merchant accounts for businesses, and even help large enterprises raise money in the financial markets).
- Retail banks are probably the banks you’re most familiar with. Your checking and savings accounts typically come from a retail bank or credit union, which focuses on consumers (or the general public) as customers. These banks provide credit cards, they offer loans, and they’re the ones with numerous branch locations in populated areas.
- Commercial banks focus on business customers. Businesses need checking and savings accounts just like individuals do. But they also need complex services, and the dollar amounts (or the number of transactions) can be substantial. They might need to accept payments from customers, rely heavily on lines of credit to manage cash flow, and work with letters of credit to do business overseas.
- Investment banks help businesses work in financial markets. If a company wants to go public, borrow a significant amount, or sell debt to investors, they often use an investment bank.
- Central banks manage the monetary system for a government. For example, the Federal Reserve Bank is the U.S. central bank responsible for managing economic activity and supervising banks.
- Credit unions are similar to banks, but they are not-for-profit organizations owned by their customers (while investors own most banks). Credit unions offer products and services more or less identical to most retail and commercial banks. The main difference is that credit union members share some characteristic in common (where they live, their occupation, or organizations they belong to, for example).
- 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.
- Mutual banks are similar to credit unions because they are owned by members (or customers) instead of outside investors.
- Savings and loans are less prevalent than they used to be, but they are still important. This type of bank was important in making home ownership mainstream, using deposits from customers to fund home loans. The name savings and loan refers to the core activity they perform: take savings from one customer and make loans to another.
Non-bank lenders are increasingly popular sources for loans. Technically, they’re not banks, but your experience as a borrower might be similar. You apply for a loan and repay as if you were working with a bank.
These institutions specialize in lending, and they are not interested in all of the other activities and regulations that apply to traditional banks. Sometimes known as marketplace lenders, non-bank lenders obtain funding from investors (both individual investors and institutional investors).
For consumers shopping for loans, non-bank lenders are often attractive—they may use different approval criteria than traditional banks, and rates are often competitive. Peer-to-peer lenders are just one example of these marketplace lenders, and they can be an excellent option whether you have high credit scores or you have fair credit.
Online lenders gained momentum with personal loans, but they offer other products as well. You can borrow for education, a home purchase or refinance, and more.
Bank Changes Since the Financial Crisis
The financial crisis of 2008 changed the banking world dramatically. Before the crisis, banks enjoyed frothy times, but the chickens came home to roost. Banks were lending money to borrowers who could not afford to repay—but getting away with it because home prices kept rising (among other things). They were also investing aggressively to increase profits, but the risks became reality during the Great Recession.
New regulations: The Dodd-Frank Act changed much of that by making broad changes to financial regulation. Retail banking—along with other markets—is now regulated by a new watchdog: the Consumer Financial Protection Bureau (CFPB). This entity gives consumers a centralized place to lodge complaints, learn about their rights, and get help. Moreover, the Volcker Rule makes retail banks behave more like they did before the housing bubble—they take deposits from customers and invest conservatively, and there are limits on the type of speculative trading banks can engage in.
Consolidation: There are fewer banks—especially investment banks—since the financial crisis. Big-name investment banks failed (Lehman Brothers and Bear Stearns in particular) while others reinvented themselves. The FDIC reports that there were 414 bank failures between 2008 and 2011, compared to three in 2007 and zero in 2006. In most cases, another bank takes over a failed bank, and customers do not experience losses as long as they stay below FDIC insurance limits.
As a result of the financial crisis and new regulations, larger banks absorbed weaker banks, and there are fewer names to choose from. Still, numerous banks exist, and they continue to provide a variety of services to individuals, businesses, government bodies, and others.