A:

In today's financial services marketplace, a financial institution exists to provide a wide variety of deposit, lending and investment products to individuals, businesses or both. While some financial institutions focus on providing services and accounts for the general public, others are more likely to serve only certain consumers with more specialized offerings.

To know which financial institution is most appropriate in serving a specific need, it is important to understand the difference between the types of institutions and the purposes they serve. The major categories of financial institutions include central banks, retail and commercial banks, Internet banks, credit unions, savings and loans associations, investment banks, investment companies, brokerage firms, insurance companies and mortgage companies.

Central Banks

A central bank is the financial institution responsible for the oversight and management of all other banks. In the United States, the central bank is the Federal Reserve Bank, which is responsible for conducting monetary policy and supervision and regulation of financial institutions. Individual consumers do not have direct contact with a central bank; instead, large financial institutions work directly with the Fed to provide products and services to the general public.

Retail/Commercial Banks

Traditionally, retail banks offered products to individual consumers while commercial banks worked directly with businesses. Currently, the majority of large banks offer deposit accounts, lending and limited financial advice to both demographics. Products offered at retail and commercial banks include checking and savings accounts, certificates of deposit (CDs), personal and mortgage loans, credit cards and business banking accounts.

Internet Banks

A newer entrant to the financial institution market is the Internet bank, which works similarly to a retail bank. Internet banks offer the same products and services as conventional banks, but they do so through online platforms instead of brick and mortar locations.

Credit Unions

Credit unions serve a specific demographic per their field of membership, such as teachers or members of the military. While products offered resemble retail bank offerings, credit unions are owned by their members and operate for their benefit.

Savings and Loan Associations

Financial institutions that are mutually held and provide no more than 20% of total lending to businesses fall under the category of savings and loan associations. Individual consumers use savings and loan associations for deposit accounts, personal loans and mortgage lending.

Investment Banks and Companies

Investment banks do not take deposits; instead, they help individuals, businesses and governments raise capital through the issuance of securities. Investment companies, more commonly known as mutual fund companies, pool funds from individual and institutional investors to provide them access to the broader securities market.

Brokerage Firms

A brokerage firm assists individuals and institutions in buying and selling securities among available investors. Customers of brokerage firms can place trades of stocks, bonds, mutual funds, exchange traded funds (ETFs) and some alternative investments.

Insurance Companies

Financial institutions that help individuals transfer risk of loss are known as insurance companies. Individuals and businesses use insurance companies to protect against financial loss due to death, disability, accidents, property damage and other misfortunes.

Mortgage Companies

Financial institutions that originate or fund mortgage loans are mortgage companies. While most mortgage companies serve the individual consumer market, some specialize in lending options for commercial real estate only.

RELATED FAQS
  1. What's the difference between investment banks and commercial banks?

    Understand the principal differences between investment banks and commercial banks, and the areas of banking services that ... Read Answer >>
  2. What factors are the primary drivers of banks' share prices?

    Find out which factors are most important when determining the share price of banks and other lending institutions in the ... Read Answer >>
  3. What are the differences between preference shares and bonds?

    Learn what information banks keep on file for their customers, and understand how this information can be used to deny an ... Read Answer >>
  4. What are key government regulations that affect investing in the banking sector?

    Discover how the global financial crisis of 2008 changed the face of banking in the United States and around the world by ... Read Answer >>
Related Articles
  1. Personal Finance

    Retail Banking Vs. Corporate Banking

    Retail banking is the visible face of banking to the general public. Corporate banking, also known as business banking, refers to the aspect of banking that deals with corporate customers.
  2. Investing

    What is a Bank?

    A bank is a financial institution licensed to receive deposits or issue new securities to the public.
  3. Financial Advisor

    Why Banks Don't Need Your Money to Make Loans

    Contrary to the story told in most economics textbooks, banks don't need your money to make loans, but they do want it to make those loans more profitable.
  4. Personal Finance

    What is a Financial Institution?

    A financial institution is in business to, among other things, accept deposits, make loans, exchange currencies, and broker investment securities.
  5. Insights

    The Role of Commercial Banks in the Economy

    We interact with commercial banks daily to carry out simple financial tasks. That said, the function and creation of a commercial bank is anything but simple.
  6. Insights

    The World's Top 10 Banks

    Learn more about the world's largest banks and how more financial power shifts eastward as China is home to four of the world's largest banks.
  7. Personal Finance

    The 5 Best Alternatives to Bank Saving Accounts

    Find out about some of the most profitable available alternatives to depositing money in a traditional bank passbook savings account.
  8. Personal Finance

    Banking Has Changed: What Does It Mean For Consumers?

    Banks have long been leading spenders on technological innovations. Learn the key changes in the banking industry and what institution is right for you.
  9. Personal Finance

    What is Fractional Reserve Banking?

    Fractional reserve banking is the banking system most countries use today.
RELATED TERMS
  1. Commercial Bank

    A commercial bank is a type of financial institution that accepts ...
  2. Financial Institution - FI

    An establishment that focuses on dealing with financial transactions, ...
  3. Depository

    On the simplest level, depository is used to refer to any place ...
  4. Business Banking

    A company's financial dealings with an institution that provides ...
  5. Cost Of Funds

    The interest rate paid by financial institutions for the funds ...
  6. Wholesale Banking

    Banking services between merchant banks and other financial institutions. ...
Hot Definitions
  1. Turkey

    Slang for an investment that yields disappointing results or turns out worse than expected. Failed business deals, securities ...
  2. Maintenance Margin

    The minimum amount of equity that must be maintained in a margin account. In the context of the NYSE and FINRA, after an ...
  3. Salvage Value

    The estimated value that an asset will realize upon its sale at the end of its useful life. The value is used in accounting ...
  4. Cryptocurrency

    A digital or virtual currency that uses cryptography for security. A cryptocurrency is difficult to counterfeit because of ...
  5. Promissory Note

    A financial instrument that contains a written promise by one party to pay another party a definite sum of money either on ...
  6. SEC Form 13F

    A filing with the Securities and Exchange Commission (SEC), also known as the Information Required of Institutional Investment ...
Trading Center