What Are the 9 Major Types of Financial Institutions?

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 nine 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.
  • Nowadays, an increasing number of financial institutions operate online, which in some instances may reduce some of their services fees.
  • 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.
  • 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.

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

A credit union is a type of financial institution providing traditional banking services and is created, owned, and operated by its members.

In the recent past credit unions used to serve a specific demographic per their field of membership, such as teachers or members of the military. Nowadays, however, they have loosened the restrictions on membership and are open to the general public.

Credit unions are not publicly traded and only need to make enough money to continue daily operations. That's why they can afford to provide better rates to their customers than commercial banks.

While members can access better rates, credit unions may provide fewer services than traditional banks and they have fewer brick-and-mortar locations than most banks, which can be a drawback for clients who like in-person service.



5. Savings and Loan Associations

Financial institutions that are mutually owned by their customers and provide no more than 20% of total lending to businesses fall under the category of savings and loan associations. They provide individual consumers with checking and accounts, personal loans, and home mortgages.

Unlike commercial banks, most of these institutions are community-based and privately owned, although some may also be publicly traded. The members pay dues that are pooled together, which allows better rates on banking products.

6. Investment Banks

Investment banks are financial institutions that provide services and act as an intermediary in complex transactions, for instance, when a startup is preparing for an initial public offering (IPO), or in merges. They can also act as a broker or financial adviser for large institutional clients such as pension funds.

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.

Global investment banks include JPMorgan Chase, Goldman Sachs, Morgan Stanley, Citigroup, Bank of America, Credit Suisse, and Deutsche Bank. 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 specialized in originating or funding mortgage loans are mortgage companies. While most mortgage companies serve the individual consumer market, some specialize in lending options for commercial real estate only.

Mortgage companies focus exclusively on originating loans and seek funding from financial institutions that provide the capital for the mortgages.

Many mortgage companies today operate online or have limited branch locations, which allows for lower mortgage costs and fees.

What Is the Main Difference Between a Bank and Other Financial Institutions?

The main difference between banks and non-banking other financial institutions is that the latter cannot accept deposits into savings and demand deposit accounts, whereas these are the core business for banks.

What Is a Financial Intermediary?

A financial intermediary is an entity that acts as the middleman between two parties generally banks or funds, in a financial transaction. A financial intermediary may lower the cost of doing business.

How Do Banks Make Money?

Commercial banks make money from a variety of fees and by earning interest from loans such as mortgages, auto loans, business loans, and personal loans. Customer deposits provide banks with the capital to make these loans.

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  1. Board of Governors of the Federal Reserve System. "Overview of the Federal Reserve System," Page 1.

  2. Fintech News. "Digital banking and neobanks."