When you think of what a bank is, you probably have a fairly simplistic view. In fact, it’s the kind of opinion the majority of people have about banks. But did you know there are different types of banks? Did you know that banks do more than just store your money away?
There is certainly a lot more to think about when considering banking for your needs, whether you’re looking for personal or business banking solutions.
Choosing a type of bank that’s right for you is crucial if you want to make the most of your money. With that in mind, this guide should help you understand the basics and give you an overview of what you should be looking for. Read on to find out more.
Are There Different Types of Banks and Different Types of Accounts?
Banks and other financial organizations come in all shapes and sizes and provide a wide range of services. The key to finding the right bank for your money is to know how various banks are organized and how they serve the community.
The fact that there are a number of different kinds of banks for you to choose from, and then, within those banks, there are different accounts you can opt for means that no matter how you want to manage your money, there will be a solution for you.
How Do Banks Work?
In addition to deposit and withdrawal services, banks provide currency exchange, foreign exchange trading, and wealth management services. The monies placed by the clients are used to give loans. So, banks serve as middlemen between depositors and borrowers. Of course, there is a different definition of the bank by different authors, but this is the basic structure of banking.
How do banks make money? Banks provide and earn interest from loans.
But is there a chance you can lose money from a bank? Will you always get back what you put in? Is the bank the safest place for anyone to deposit their cash?
The answer is yes; banks can lose your money, and there is no such thing as a ‘safe’ place.
Understanding the situation and what you can do about it is essential for your own financial security. Plus, remember that your money is secure as long as it's guaranteed by the Federal Deposit Insurance Corporation (FDIC).
When a bank is unable to satisfy its commitments, it fails. Failures occur because banks don’t just store your money in vaults. When you deposit your funds, the bank invests that money. This is the simple answer to the question, “What do banks do with your money?”
If the bank suffers significant losses in an investment, it may collapse. When that happens, your money is in danger, but there are safety nets to fall back on in many cases.
What Are the 4 Types of Banks?
As we’ve said, there are different types of banks, and it’s crucial to find the right one for your needs. How many types of banks are there? In general, there are four main types of banks.
Let’s break them down in more detail below.
Community Banks
Community banks, or community development banks, are locally owned and managed financial institutions that have no connection to a bigger bank. Furthermore, the target consumers for this sort of institution are often local residents and company owners who operate in the same neighborhood.
A typical community bank provides a comprehensive variety of financial services, such as checking and savings accounts. Mortgages and other loan kinds are also covered. In addition, certificates of deposit are available too.
Credit Unions
Credit unions are more like cooperatives than banks. They are considered non-profit organizations and are free from most types of taxes. However, the average credit union provides the majority of the services offered by retail banks. The distinction is that the member customers are the owners of credit unions.
Investment Banks
Investment banks are financial institutions that provide corporate customers with access to capital markets in order to obtain cash for growth. They assist businesses in raising capital in the stock and bond markets to finance acquisitions or other financial initiatives. They also help in mergers and acquisitions by identifying firms that might be for sale and fit the buyer's requirements.
Online Banking
Unlike traditional banks, online banks – known as neobanks – don’t rely on physical branches. Instead, the whole process is carried out online, including deposits, withdrawals, money transfers, etc. Since the activity is conducted online, a depositor's account can be accessed 24 hours a day, seven days a week.
One of the advantages of using an online bank is that you don't have to worry about your location. In addition, these institutions can charge reduced fees while still offering competitive returns on investments.
What Are the Main Types of Bank Accounts?
Now that you know what the main four types of banks are, it’s also useful to know the different types of bank accounts in the USA for both personal and business needs.
Checking Accounts
The checking account is the most basic sort of bank account. Consider it your home base. Most individuals store their money in this account since it’s where their paycheck is deposited. Additionally, you can use it to pay your bills and other expenses.
Checking accounts, which can be opened at a conventional or online bank, include a debit card, and you can withdraw the cash from your bank account on the spot. Depending on the vendor, some transactions may take a few days to complete.
Savings Accounts
A checking account and a savings account are often used in tandem, so if you're opening one, you may as well open the other. A savings account is exactly what it sounds like: a location where you can deposit money that you wish to save. For example, you can make a health savings account or college savings account.
You won't become wealthy by putting your money in a savings account (the typical interest rates right now don’t even reach 1%). Still, it will help you obtain financial literacy and provide a place to stash surplus cash you don't need right now.
Money Market Accounts
If you’re looking for better and more profitable types of accounts to put your savings, a money market account might work for you. It’s a high-interest savings account available from financial organizations such as banks and credit unions. This account could be the best option for you if you're saving for a future purpose or want your money to grow faster while avoiding unsecured market investments.
Certificate of Deposit
A certificate of deposit (CD) is a form of savings account that provides a much greater interest rate on your funds compared to the regular savings accounts in return for restricting access to your money for a certain amount of time. The longer you agree to keep your money, the better return you’ll get.
If you need to withdraw money from your CD earlier, you may be able to do so, but this will often incur a penalty. So, if you believe you may need the money in the near future, a CD may not be the best option for you.
Choosing a Type of Bank That’s Right For Your Needs
Choosing the right bank for your needs will make it simpler to manage your accounts — and it may even save you money. With that in mind, it’s crucial to know how to choose the right bank account.
Ask yourself which bank should I open an account with and make a list of the pros and cons of each bank and account. For example, there is no point in looking for the best banks for checking accounts if you actually need a CD or savings account.
This is particularly important if you’re wondering how to choose a bank for the first time. Many people stick with their bank even if it isn’t quite right for them as it seems hard to switch, so getting things right from the start can be very useful.
Conclusion
When it comes to the different types of banks, it’s wise to take your time. Choosing a type of bank that’s right for you will help you feel more confident with your financial decisions.
