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 for serving a specific need, it is important to understand the difference between the types of institutions and the purposes they serve.

Key Takeaways

  • There are 9 major types of financial institutions that provide a variety of services from mortgage loans to investment vehicles.
  • As financialization continues to permeate our lives, it is increasingly likely that you will have an account or product offered by several of these types.
  • Here we take a look at these, from central banks to neighborhood banks and everything in between.

1. Central Banks

Central banks are the financial institutions 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 Federal Reserve Bank to provide products and services to the general public.

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.

2. Retail and 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.

3. Internet Banks

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

Under internet banks, there are two categories: digital banks and neo-banks. Digital banks are online-only platforms affiliated with traditional banks. However, neobanks are pure digital native banks with no affiliation to any bank but themselves.

4. Credit Unions

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

5. 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.

6. 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, traditionally known as mutual fund companies, pool funds from individuals and institutional investors to provide them access to the broader securities market. Robo-advisors are the new breed of such companies, enabled by mobile technology to support investment services more cost-effectively and provide broader access to investing by the public.

7. Brokerage Firms

Brokerage firms assist 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.

8. Insurance Companies

Financial institutions that help individuals transfer the 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.

9. 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.