What Is a Depository?

Depositories Explained

Woman uses bank card to withdraw money at ATM
•••

Mixmike / Getty Images

A depository’s primary function is to hold on to your money for you, keep it safe, and give you access to it when you need it. Two common examples are banks and credit unions. The depository receives most of its funding through deposits and makes money by lending those deposits to others in the form of mortgages and loans.

Find out how depositories work, the types of services they offer, and how they differ from non-depository and repository institutions.

Definition and Examples of a Depository

A depository is a financial institution whose primary function is to collect deposits from individuals and businesses and assist them in trading securities. Rather than keeping your money in a potentially risky place, a depository keeps it safe and insured.

  • Alternate definition: A physical building or warehouse where valuable assets are housed may also be called a depository.

Some common examples of depositories include credit unions, commercial banks, retail banks, and thrift institutions.

How a Depository Works

A depository receives most of its funding through customer deposits. These include direct deposits, cash deposits at a teller or ATM, electronic transfers from other banks, and check deposits. Deposits are federally insured, so you’re guaranteed to get your money back, up to certain amounts, if the institution goes under.

If you keep your deposits at a bank, your funds are insured through the Federal Deposit Insurance Corporation (FDIC). If you use a credit union, they’re insured through the National Credit Union Administration (NCUA).

As a customer of a depository, you can make demand deposits and withdraw your money whenever you’d like. For example, you can put your money in your depository accounts through direct deposit, an ATM, or a check made out to you at your local bank branch. You can also take your money out of the depository whenever you want via ATM, wire transfer, or going into the bank in person.

Depositories are legally required to keep a minimum amount of money in their vault at all times. If the depository issues too many loans or customers make too many withdrawals at once, it may have to borrow money from other banks or the Federal Reserve to stay within the legal requirements.

Along with deposits and withdrawals from savings and checking accounts, a depository may offer other types of services. These include credit cards, mortgages, auto loans, retirement accounts, and business services.

Benefits of a Depository

Keeping your money in a depository reaps many benefits, including safety, earning interest, and helping to keep the economy healthy.

Reduced Risk of Having Assets Stolen

You run a much higher risk of having your money lost, stolen, or destroyed if you keep it in your home instead of at a bank. This is perhaps the biggest benefit of using a depository: You don’t have to hold the physical asset yourself. Instead, the depository holds onto it for you, and federal insurance ensures you get your full deposit back, up to a certain amount, if the institution buckles.

Earned Interest

Not only does a depository hold onto your money for safekeeping, but it may pay you interest, as well.

You typically earn the most interest on time deposits such as certificates of deposits (CDs). You earn a bit more on time deposits because the bank is guaranteed to have access to your money until it matures.

You will usually earn the least amount of interest on demand deposit accounts such as checking and savings accounts. Less interest is earned with these accounts because you have access to your funds immediately whenever you’d like.

Economy Growth

Your money doesn’t just sit in a depository collecting dust. Institutions usually lend it out to others in the form of mortgages and loans. They earn interest on the money they lend out before passing a small portion of that interest back to you. This steady shift of moving funds from depositors to borrowers helps the economy run efficiently.

Types of Depositories

Three main types of depositories exist in the U.S.

Commercial Banks

A commercial bank is a for-profit depository that offers general banking services to individuals and companies. Commercial banks hold state or federal charters, allowing them to accept deposits and pay interest to depositors. The retail banking services that commercial banks offer to individuals include checking accounts, savings accounts, and loans. Commercial banks are also equipped to offer financial services to businesses including deposit accounts, lines of credit, commercial loans, global trade services, and payment processing.

Commercial banks may have different divisions that specialize in services for specific customers, such as retail and business banking segments.

Thrift Banks

Thrift banks, also known as savings associations, serve a local community. Although they offer most of the same services you’d find at a regular bank—such as CDs, credit cards, and auto loans—they’re primarily focused on savings accounts and mortgages. In fact, thrift institutions were originally formed to make homeownership more attainable for working and middle-class families.

Credit Unions

Credit unions are somewhat like co-ops for banking. You pay a small fee to become a member, then the credit union pays you interest in the form of dividends each month or each quarter.

Credit unions are nonprofit organizations focused on providing financial services to their community. They typically pay no federal or state taxes, which is why they’re often known to offer better interest rates than regular banks.

Depository vs. Repository

Depositories hold financial assets such as cash and securities. One example of a depository is Wells Fargo. A repository, such as a library, holds intellectual assets such as data, files, and knowledge.

Depository Institution Repository Institution
Stores financial assets Stores intellectual assets
Examples: credit unions and banks Examples: libraries, data-storage facilities, information-based websites

Depository vs. Non-Depository

Depository institutions focus on collecting demand deposits from their customers. Common types include credit unions, retail banks, and thrift banks. On the other hand, non-depository institutions do not accept demand deposits. They typically act as intermediaries, obtaining funds and then passing them off somewhere else. Some common types include brokerage firms and insurance companies.

Depository Institution Non-Depository Institution
Accepts deposits and stores them for safekeeping Provides financial services but isn’t allowed to accept demand deposits for safekeeping
FDIC- or NCUA-insured Can be SEC-insured or have some other type of insurance depending on the type
Examples: credit unions and banks Examples: brokerage firms and insurance companies

Key Takeaways

  • A depository is a type of institution that mainly receives its funding through deposits made by individuals and businesses. It then lends its deposits out to other customers in the form of loans and mortgages.
  • As a customer of a depository, you can withdraw your funds whenever you’d like.
  • There are three main types of depositories: commercial banks, thrift banks, and credit unions.