What Are Common Types of Banks and Which Is Right For Me

When you open a bank, you see many types of banks and need clarification as to which bank service to use. For example, if you want a bank account that provides services online as well as an account that provides customer deposit accounts and saving accounts as well. Now the thing is, the common banks, like your local commercial banks, might provide all their services or might provide two services like a savings account and a deposit account. However, there are also online banking accounts that provide two services: online services and savings accounts. You might have questions like should I keep accounts at multiple banks? Or how to avoid racial profiling at banks or even questions about how to switch banks in Canada.

Services like cash withdrawals, savings accounts, and so on are common when it comes to financial institutions, but other types of bank systems and functions make them different types of banks. These different types of banks can help you in different and difficult situations.

Let's first understand how banks function.

How Do Banks Function?

Typically, banks act as a middleman by linking individuals who want a secure place to keep their money with those who require loans. When people deposit their funds into bank accounts, the banks then provide loans to individuals, families, or businesses for significant purchases like homes and vehicles.

To entice customers, banks offer interest on the money held in accounts, such as savings accounts. The primary source of income for banks comes from the interest and fees charged on the loans they provide.

You might be asking, what are common types of banks?

What Are Common Types Of Banks

There are many types of financial institutions and each has some unique services that they provide. Their unique services can vary for individuals and businesses as well. Like Brokerage firms' services and so on. The following are the common types of financial institutions and services.

Commercial Bank

Commerical banks, also known as traditional banks, are the most common and oldest type of banking services in the world. They offer a range of services like giving business loans, accepting deposits, foreign exchange services, bank accounts, savings and checking accounts, and providing basic investment options to individuals and private companies.

Commercial banks also provide additional financial services such as global trade services, merchant services, insurance products, borrow money, mortgage loans, bank accounts, business clients services, trade finance retirement products, commercial real estate, personal accounts, and treasury services. They earn money by giving loans to individuals and companies and earning interest from them, as well as charging service fees.

The well-known Commercial Banks around the world are Standard Chartered, U.S. Bancorp, Wells Fargo, Capital One, and many more.

Retail Banks

Retail Banks offer universal banking, commonly known as consumer banks or personal banks, and provide a range of banking services tailored to meet the individual requirements of customers. These banks offer a necessary following of financial services, savings accounts, checking accounts, savings deposits, raising money, regular transactions, personal loans, debit and credit cards, as well as brokerage services.

Also, to serve the general public, retail banks extend their services to include business bank accounts, making them a viable option for small businesses. Small enterprises often choose retail banks over commercial banks due to certain acceptability limitations, such as a lack of necessary credit history or revenue. Moreover, the convenience factor plays a significant role in their decision-making process, as retail banks typically have a wider network of branches and longer operating hours compared to commercial banks.

The common retail banks are SunTrust, Bank of America, Agricultural Bank of China, Bank of China, and many more. Countries like China, India, and many third-world and developing countries provide financial institution services of retail banks, which give more opportunities for their local people to invest.

Investment Bank

Investment banks are financial institutional investors types of banks that help businesses in accessing the capital markets to secure funds for growth. They aid large corporations in raising funds through the stock market and bond market to support their expansion, acquisitions, investment portfolios, hedge funds, mutual funds, or other financial strategies for corporate banks. They provide complex services for financial transactions using federal deposit insurance corporations through the federal government. Additionally, they play a crucial role in facilitating mergers and acquisitions by identifying suitable companies that meet the buyer's requirements.

Investment banks generate revenue by providing advisory services to corporate clients, aiming for cash flow and financial stability, engaging in financial market trading, and representing clients in mergers and acquisitions. Interest Rates are often high. Notable examples of prominent investment banks in the United States are Merrill Lynch, Goldman Sachs, and Bank of America. There are top banks in Canada as well, like the top 5 banks in Canada, and there are ways to split money between banks as well.

Credit Union

Credit unions are financial intermediaries to businesses' financial systems. They provide services like loans and help in creating savings and deposit accounts. Unlike other traditional banks, which focus on businesses that will earn profit in the future or have business statements, the credit union aims at not-for-profit organizations, making it a different type of bank.

Credit unions focus on providing credit services for major purchases from their credit union members. Credit unions are managed by their members, who rely on the input of elected board members to make decisions. Typically, credit unions cater to specific groups, such as residents of a certain area, low-income individuals, or military personnel. The lower fees and loan interest rates they offer make them a great option for banking.

Banks like Navy Federal Credit Union and Bethpage Federal Credit Union.

Savings and Loan Associations

Savings and Loan Associations (S&Ls), also called Thrift Banks, are financial institutions owned by their members. They specialize in providing mortgages, refinance loans, borrow money, and alternative home loans using the savings deposited by their customers. Although savings and loan associations primarily focus on home financing, they also offer limited lending services to businesses and provide savings accounts and various types of deposit accounts.

S&Ls were mostly cooperative groups where members received better interest rates on their savings compared to commercial banks. Initially, they operated without government regulations, but now they are monitored by the federal Office of Thrift Supervision.

The Thrifts have traditionally provided customers with higher interest rates on their savings due to the low-interest funding they receive from the Federal Home. This, combined with their focus on serving the average person, has always given them an edge over commercial banks. Although the competition has increased, you may still be able to secure a higher interest rate on a savings account with a lower minimum at a savings and loan institution.

The well-known savings and loan associations' financial institutions are Discover Bank, Capital One 360, and Synchrony Bank.

Shadow Banking Services

The shadow banking system is made up of financial groups that do not have to follow the same strict rules and regulations as traditional banks. Similar to regular banks, shadow banks handle credit and various types of assets. However, they obtain their funding through borrowing, connecting with investors, or creating their funds instead of using money issued by the central bank.

Money market funds and hedge funds are two examples of shadow banks. Recently, they have been a subject of controversy for many people. Some individuals blame the less-regulated shadow banking industry for contributing to the mortgage crisis that led to the Great Recession.

Online Banks And Neo Banking

Online banks sometimes even called Neo banking are a different type of banking, it is a new way of doing many banking services Well it's not even banking but rather a cash management and saving account that is accessible online.

Yes, there are features as to where there are online services for people's accounts, which are provided by many traditional banks, commercial banks, and so on. But unlike normal banks the Neo bank takes one step ahead, the online banks are the type of banking that merge information and make a very easily accessible form of service. This means that you can access your online bank account through just the internet and an application or a website of the online banks.

These innovative companies develop appealing and user-friendly interfaces for customers and may provide various benefits. However, they typically collaborate with a conventional bank that safeguards customers' deposits and handles the financial operations behind the scenes. Nevertheless, there are a few cases where online banks are obtaining national charters or acquiring small banks that already possess a national charter.

The well-known online banks are Cashapp, Chime, Varom, Lunar, KOHO, and many more.

Challenger Banks

Some people get between Challenger Banks and Neo banks. Challenger banks, also known as online banks, digital banks, or virtual banks, are changing traditional banking methods. They provide similar services to traditional banks, but mainly through digital platforms. Many challenger banks do not have physical branches, although a few still have a small number of physical locations.

More and more people are considering this option because of the challenges they may face with traditional banks. Some people have concerns about the security and legitimacy of challenger banks, but many online banks have proper banking licenses in the countries they operate, so they are regulated by local authorities. These banks are a growing trend that focuses on improving services through innovation, technology, and convenience.

On the other hand, neobanks usually offer limited banking and financial services due to their license restrictions. Most neobanks do not have an official banking license.

Community Banking

CD banks, also known as community development banks, are financial institutions that offer banking services to individuals and businesses. They accept deposits, open and manage accounts, provide loans, and charge fees for their services. Commercial banks make profits from the fees they charge, monthly service payments, loans, and fees for safe deposit boxes.

They provide a secure way for individuals to store and keep track of their money, offer loans that can benefit businesses, and enable online banking transactions. These banks have multiple branches in their local area, making them easily accessible to everyone. However, using a commercial bank does come with certain risks, such as credit risk, operational risks, and liquidity risks. To mitigate these risks, banks have their risk management strategies in place.

Well-known names for community banking are New York Green Bank and Technology Fund.

Green Environment Banking

Green Banks are financial institutions that prioritize protecting the environment and fighting climate change. Unlike regular banks, they concentrate on financing renewable energy, energy efficiency, and other eco-friendly projects instead of solely pursuing profits.

Governments establish these banks at different levels and give them a specific mission to achieve environmental objectives. Their main aims include attracting private investments, lowering energy expenses, advancing green technologies, and fostering community growth.

Central Bank

The central bank is the top authority when it comes to banks. It oversees the money supply in a country or a group of nations. It supervises commercial banks, determines interest rates, and manages the circulation of money.

Central banks also work towards achieving a government's monetary policy objectives, such as preventing deflation or stabilizing prices. During challenging economic systems, auto loans from the Federal Reserve Bank can provide loans to prevent the monetary system from collapsing. In Canada, the Bank of Canada is the central bank.

Microfinance Bank

Microfinance, also known as microcredit, is a banking service for low-income individuals or groups without access to financial services. Microloans can be as small as $50 or as large as under $50,000. Some banks also offer checking and savings accounts, micro-insurance products, and financial and business education to clients. Microfinance aims to help impoverished individuals become self-sufficient.

The Islamic Bank

Islamic banks are financial institutions that operate according to Islamic law, also known as Sharia. Unlike conventional banks, Islamic banks do not charge interest on loans, as this is considered exploitative in Islam. Instead, they use alternative methods to generate revenue, such as equity participation. This means that if the bank finances a business, it shares in the profits rather than charging interest.

Additionally, Islamic banks avoid investing in businesses that engage in prohibited activities, such as alcohol or pork production. They also steer clear of speculative transactions and contracts with excessive uncertainty or risk. These principles ensure that each transaction is tied to a tangible asset or service and that risks and profits are shared fairly. As a result, Islamic banks tend to adopt more cautious investment strategies, avoiding high-risk ventures that could lead to economic instability. Some examples of Islamic banks include Al Taqwa Bank, Al-Amanah Islamic Bank, Al-Aqsa Islamic Bank, and Dubai Islamic Bank.

Private Bank

Private banks are specifically created to serve wealthy individuals and are not commonly known or encountered by regular people. They primarily cater to high-net-worth individuals, such as CEOs of big companies or those with at least USD 1 million in liquid assets.

Nevertheless, the minimum amount of money needed to open an account can differ among private banks. Private banks offer various financial products and services, including wealth management services and account management, but they charge fees for these services. However, these fees can be waived if the account holder maintains a certain minimum balance, which varies from one private bank to another.

Here are some examples of private banks: Morgan Standley Private Bank and Citi Private Bank Key Services Offered.

Now, You might be wondering which type of bank is the right choice for you.

Which Is The Best For You:

It all depends on what type of account and services you want. If you want an individual account with the services of a savings account and a deposit account with some associated features, then a normal commercial account is enough for you. In numerous situations, the key to finding a suitable account is not so much about the financial institution but rather about the services, features, and fees offered by the specific account.

For example, if you are searching for a high-yield savings account, it is important to consider the account's annual percentage yield and any requirements regarding activity or minimum balance. If you can earn a significant amount of interest, it becomes less relevant whether you choose a bank or a credit union to store your money.

Conclusion:

Having a bank account and using the beneficial services of a financial institution is important as they can help you and your businesses in many ways. But there are many types of financial institutions and each financial institution has its use and features that differentiate it from the other. These will help you understand which one you should choose.