I've worked in banking for a few years now. But even so, I still find myself amazed by how many financial institutions I come across while walking or driving around town.
Why are there so many? Why are some really nice, but always look empty? What is the difference between each one?
By now, I felt it was long overdue that I answer these questions so that I could be a more useful member of my team. While the results I got were more complex than I expected, in this post, I will highlight what sets the most common types apart from each other. Let's dig in!
In the United States, this is our nation's primary economic authority, known as the Federal Reserve. They are responsible for the monetary policy of the country, which includes tasks like distributing currency, managing interest rates, economic research, and regulating commercial banks.
These are the name-brand banks we're all familiar with (e.g., JPMorgan Chase, Bank of America, Wells Fargo, etc.). They serve the basic needs of most businesses and people by offering a robust list of services like checking accounts, savings accounts, loans, mortgages, credit cards, merchant services, cash management, lines of credit, business credit cards, and more. As such, they are the most common type of bank.
This is another term for your typical bank, but it primarily focuses on the individual rather than the business. Within the United States, virtually all commercial banks also offer retail services, but the experience is so seamless you never have to consider the difference between the two.
As the name implies, these banks specifically work with businesses of various sizes. While providing standard services like loans, credit, and cash management, they may also help with equipment lending and financing.
An investment bank primarily works with businesses and governments to provide financial services. These services include things like raising capital and providing counsel; but also includes managing the issuing, purchasing, and trading of securities.
Securities is a blanket term that includes stocks, bonds, mutual funds, exchange-traded funds (ETFs), options, and derivatives. Goldman Sachs, Morgan Stanley, and Merrill Lynch are all examples of investment banks.
Private banks are financial institutions that provide specialized services to high-net-worth individuals and families. They offer a wide range of services, including investment management, trust and estate planning, and tax planning. Private banks typically have higher account minimums than traditional banks, and they offer more personalized service.
These operate as non-profit organizations that provide many of the same services as commercial or retail banks. However, because they have no shareholders to share their earnings with, they can reinvest that money into the bank and offer better services, rates, and lower fees to their members.
Here are banks that function exclusively online, with no physical branches. As a result, they can offer most of the standard services like checking accounts, savings accounts, and loans while also providing convenient perks that, for their members, make up for the lack of face-to-face contact. Examples of online banks include Ally and Chime.
These institutions focus on a specific geographic area and are typically involved with local causes, organizations, and businesses. This allows them to fund efforts that larger banks would determine are too risky. While similar to credit unions in many ways, they differ in that community banks may be privately owned or publicly traded.
A cooperative or mutual bank is owned and controlled by its members. When decisions need to be made, each member has one vote, which involves them in decision-making. Because of its structure, profits are either reinvested back into the bank or distributed to its members.
Operating under Islamic law (Shariah), these banks operate under different principles in their religious adherence. Some of these include not charging interest, linking transactions to tangible assets, prohibition of ambiguity in agreements, and refusing to finance ventures that are considered sinful.
Often backed by national or international institutions, development banks aim to serve the underserved. This is done by providing financing and counsel to businesses and initiatives that might not be able to acquire funding from larger banks due to their risk profile.
As you can see, each type of financial institution plays a unique role in our pursuit of economic stability and growth. The sheer variety of options demonstrates the complexity of the financial sector as it responds to the needs of customers, societies, and economies. While understanding this ecosystem may help us navigate our own decisions surrounding money, it also sheds light on the intricate workings of our economy.
As you may guess from this post, a lot goes into defining what makes one financial institution from another. So feel free to dig deeper if you are interested! I genuinely hope that you learned as much as I did and that you treat every new piece of knowledge as an investment in yourself!