A piggy bank may work when you’re a kid, but as you start earning and saving money, you need a more functional place for your money.
Banks are financial institutions that hold and insure your deposits, protecting them from theft, loss or natural disasters. They can also lend you money when you need to make a big purchase, like a house or car.
With thousands of banks serving different audiences and financial goals, the definition and purpose of a bank can start to become blurry. Continue reading to learn more about how banks work and the products and services they offer.
A bank is a type of licensed financial institution that accepts deposits and makes loans to its customers. Banks typically offer checking accounts, savings accounts, mortgages, auto loans, and more, but offerings can vary greatly by bank.
Banks are privately owned or publicly traded for-profit entities. They can provide services to individuals, governments or businesses (including other banks), but must have a charter (either at the federal or state level) to operate. To obtain a charter from the federal or state government, banks must demonstrate that they are likely to have a “reasonable chance of success” and “operate in a safe and sound manner.”
Banks accept deposits from customers, who put their money in checking accounts, savings accounts or other deposit accounts. Banks then pool this money to provide loans to their customers. They also process payments, extend credit, and pay interest on customer deposits.
When you deposit money in a federally insured bank, you receive insurance from the Federal Deposit Insurance Corporation (FDIC). The FDIC protects deposits of up to $250,000 per depositor, per institution, per account category in the event of bank failure.
Read more: List of failed banks: How many banks failed in the last 10 years?
Since banks are businesses, they need to be profitable. Banks make money by charging interest on loans, charging various types of fees (account maintenance fees, overdraft fees, ATM fees, and more), and from their own investments.
Banks offer a range of different products and services depending on their size and customer base. Below are some of the common accounts, services, and features that banks can offer:
There are many types of banks, each serving a different audience or offering unique features. Here’s a breakdown of some common types:
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Central bank: Central banks serve a country, not individual customers. Its role is to manage national economies through monetary policy: adjusting interest rates, managing inflation and maximizing employment. The Federal Reserve is the central bank of the United States.
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Commercial bank: The term “commercial bank” encompasses several specific types of banks. By definition, commercial banks are financial institutions that accept deposits and make loans. JP Morgan Chase and Wells Fargo are examples of American commercial banks.
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National bank: National banks are a type of commercial bank. They are authorized and regulated by the Office of the Comptroller of the Currency and not at the state level.
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Regional bank: Regional banks are another type of commercial bank. They are defined as having between $10 billion and $100 billion in total assets and often serve a particular region of the country.
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Community Bank: Community banks are also commercial banks, but they are smaller than national and regional banks and have assets totaling less than $10 billion. They serve a specific city or area, often with services targeted to the people who live there. While community banks may offer fewer services compared to national or regional banks, they tend to excel in customer service.
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Online banking: Online banks offer many of the same products and services as traditional commercial banks, but they do not maintain physical locations. Instead, all banking is done through a bank’s website or mobile app. Due to lower overall costs, online banks typically offer fewer fees and higher savings interest rates.
Read more: These are the 20 largest banks in the US.
Like banks, credit unions offer deposit accounts, loans, and other financial products and services to consumers. But there are several important differences between banks and credit unions in terms of how these two types of institutions operate:
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Business structure: While banks are for-profit businesses, credit unions are nonprofit financial institutions.
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Property: Banks are either privately owned or publicly traded. Credit unions, meanwhile, are owned and controlled by their members.
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Insurance coverage: Both banks and credit unions offer deposit insurance up to federal limits, but coverage is provided by different entities. The FDIC insures banks, while the National Credit Union Administration (NCUA) insures credit unions.
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Membership requirements: Banks do not require membership, but credit unions do. To join a credit union, you must meet certain eligibility requirements, such as living in a particular area, working in a certain industry, or donating to a specific cause.
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Rates and costs: Because credit unions are nonprofit entities, they are generally able to pass along profits to their members. This could translate into higher interest rates on savings, lower account fees, and lower borrowing costs. Meanwhile, banks tend to charge higher fees and offer lower interest on savings.
Read more: Credit Union or Bank: Which is Right for You?
With over 4,000 banks in the US, choosing the right bank can be overwhelming. But there is no perfect bank: you just have to choose one that offers what you need.
If you’re having trouble choosing a bank, these considerations may help you:
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Offerings: Make sure a bank offers the accounts and services you need. For example, if you want to open a checking account and a high-yield savings account at the same institution, confirm that the bank offers both.
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Fee: Fees can affect your account balance and should be avoided if possible. Look for banks that offer no fees or allow you to get a fee waiver when you meet certain requirements.
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Interest rates: If you’re opening a savings account, look for banks that offer competitive returns. On the other hand, if you are looking for a loan, the lower the interest rate, the better.
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Access: Some people like to visit a branch while others prefer to bank online. If you fall into the first category, be sure to choose a bank with accessible locations. If mobile banking is your thing, choose a bank with a highly rated, easy-to-use mobile app.
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Customer Service and Reputation: Customer service goes a long way to making or breaking your banking experience. Check third-party review sites, such as Better Business Bureau or Trustpilot, to get an idea of ​​what a bank offers. You can also search for a bank in the Consumer Financial Protection Bureau’s complaint database to get information about customer complaints.