When you think of a bank, the first thing that comes to mind might be the institution that holds your checking or savings account. 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 are often kept with a retail bank, which focuses on consumers (or the general public) as customers. These banks offer loans and may provide credit cards, and they’re the ones with numerous branch locations in populated areas.
- Commercial banks focus on business customers. Businesses need checking accounts just like individuals do. They also need complex services, and the dollar amounts (and the number of transactions) can be substantial. Commercial banks, which are also called "business banks" or "corporate banks," manage payments for customers, provide lines of credit to manage cash flow, and offer foreign exchange services for companies that do business overseas.
- Investment banks help businesses raise capital in financial markets. If a company wants to go public or sell debt to investors, it often uses an investment bank. This kind of bank also may advise corporations on mergers and acquisitions.
- Private banks provide services exclusively to wealthy clients, usually those with at least $1 million of net worth. They help clients manage their wealth, provide tax advice, and set up trusts to avoid taxes when leaving money to descendants.
- Central banks manage the monetary system for a government. For example, the Federal Reserve is the U.S. central bank responsible for supervising banks and setting monetary policy to control inflation, reduce unemployment, and provide for 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.
- 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. Also like credit unions, they tend to be active in only a single community.
- Savings and loans are less prevalent than they used to be, but they are still important. This type of bank helped make homeownership mainstream, using savings deposits from customers to fund home loans. The name savings and loan is derived from that core activity.
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 it 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 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 refinancing, and more.
Frequently Asked Questions (FAQs)
How do banks work?
Banks are designed to give people a safe place to store their money and earn a small amount of interest. To provide this service without charging you, a bank uses a portion of your deposits to loan money to other customers and profit off the interest. Banks stay in business because of the difference between the interest they pay and the interest they receive (along with fees they charge for specific services). To avoid defaulting on your deposits, banks keep a large portion of their funds available in reserves.
Why is banking important?
Banks play a central role in a functioning economy. Not only do they provide a place to store your money safely, but they also enable consumers and businesses to borrow money for important tasks like buying a home, starting a business, and purchasing a car. There are other financial intermediaries, but without banks, many critical parts of the economy wouldn't work as easily.
How do I find the right bank?
Choosing a bank is a personal decision that involves weighing many different considerations. When you're looking at banking options, consider important factors like location, your preference for in-person or online banking, interest rates, fees, and the variety of services available. Finding the right bank will depend on which of these factors are most important to you.