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 Federal Reserve Bank to provide products and services to the general public.

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.

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. (For related reading, see: The Pros and Cons of Internet Banks.)

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.

(For related reading, see: Banking: How to Choose a Bank.)

RELATED FAQS
  1. How does investment banking differ from commercial banking?

    Discover how investment banking differs from commercial banking, the responsibilities of each and how the two can be combined ... Read Answer >>
  2. 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 >>
  3. What economic indicators are important to consider when investing in the banking ...

    Find out which economic indicators are most useful for investors in the banking sector, especially those influenced by central ... Read Answer >>
  4. What is the banking sector?

    Learn why the banking sector is a vital industry to our economy, what it does to drive the economic growth and understand ... Read Answer >>
Related Articles
  1. Insights

    What Do the Federal Reserve Banks Do?

    These 12 regional banks are involved with four general tasks: formulate monetary policy, supervise financial institutions, facilitate government policy and provide payment services.
  2. 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.
  3. Personal Finance

    What is Fractional Reserve Banking?

    Fractional reserve banking is the banking system most countries use today.
  4. Investing

    Financial Institutions: Stretched Too Thin?

    Find out how to evaluate a firm's loan portfolio to determine its financial health.
  5. Investing

    Analyzing A Bank's Financial Statements

    A careful review of a bank's financial statements can help you identify key factors in a potential investment.
  6. Insights

    A Brief History of U.S. Banking Regulation

    From the establishment of the First Bank of the United States to Dodd-Frank, American banking regulation has followed the path of a swinging pendulum.
  7. Personal Finance

    The Best Way to Borrow

    There are many ways to secure funding. Find out the pros and cons of each way to borrow.
RELATED TERMS
  1. Financial Institution - FI

    An establishment that focuses on dealing with financial transactions, ...
  2. Business Banking

    Business banking is a company's financial dealings with an institution ...
  3. Depository

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

    Universal banking is a banking system in which banks provide ...
  5. Federal Home Loan Bank System - FHLB

    The Federal Home Loan Bank (FHLB) System is an organization created ...
  6. Institutional Fund

    An institutional fund is a fund with assets invested by institutional ...
Trading Center