DEFINITION of 'Nonbank Banks'

Nonbank banks are financial institutions that are not considered full-scale banks because they do not offer both lending and depositing services. Nonbank banks can engage in credit card operations or other lending services, provided they do not also accept deposits.

The Bank Holding Company Act of 1956 prohibits nonbank companies from owning banks as subsidiaries, but they may own other nonbank banks.

BREAKING DOWN 'Nonbank Banks'

Many nonbank banks that allow deposits are insured by the Federal Deposit Insurance Corporation FDIC, and reserve requirement restrictions will apply to these institutions. Nonbank banking has expanded greatly in recent years, as non-financial institutions such as retail companies and auto makers have entered the lending business. Because many companies try to stretch the rules on banking rights, the U.S. government has massively restricted new chartering of nonbank banks since the late 1980s.

Examples of Nonbank Banks

One example of a nonbank bank is the women’s clothing line Ann Taylor offering customers a credit card for purchases. With the Ann Taylor credit card, customers are able to earn five rewards points for every dollar spent in stores or online. In addition, card holders will receive $20 reward cards for every 2,000 points earned, as well as a $15 birthday gift. With online access card holders can update their profiles, pay their bills, and view statements on desktop or mobile devices.

Providers of payday loans are also considered nonbank banks. A payday loan is a short-term, high-risk loan that is often taken out of a borrower’s next paycheck. Many payday lenders charge excessively high interest rates for these loans, making it very difficult for borrowers to pay back the principal and interest in an emergency situation. Payday lenders will often roll over loans into subsequent paychecks if a borrower cannot pay his or her debts on time, increasing the interest and compounding the risk. These loans are often called predatory loans as they take advantage of already vulnerable individuals and have a reputation for hidden provisions that charge added fees.

While some payday loans may be available online, most payday loan providers are typically small credit merchants with physical locations that allow onsite credit applications and approval. To complete a payday loan application a borrower typically provides recent paystubs. From there, lenders will generally base their loan principal on a percentage of the borrower’s predicted short-term income, using borrower’s wages as collateral.

RELATED TERMS
  1. Loan Shark

    A loan shark is a person or entity that charges borrowers interest ...
  2. Non-Banking Financial Company - ...

    Non-banking financial companies, or NBFCs, are financial institutions ...
  3. Postdated

    A postdated check or draft will display a future date on it. ...
  4. Unsecured Loan

    An unsecured loan is a loan that is issued and supported only ...
  5. Loan Officer

    A loan officer is a representative of a bank, credit union or ...
  6. Commercial Bank

    A commercial bank is a type of financial institution that accepts ...
Related Articles
  1. Tech

    Can the Banking Industry Defend Itself Against Alternative Lending?

    If it learns to embrace fintech like its non-bank competitors have done.
  2. Personal Finance

    Payday Loans Don't Pay

    Hold too tightly to this rescue line and you'll soon be drowning in debt.
  3. Personal Finance

    Freddie Mac Supporting Non-Bank Mortgage Companies

    Freddie Mac has started quietly supplying credit to non-bank mortgage lenders, raising the ire of the traditional industry players.
  4. Personal Finance

    New Payday Loan Regs: Pros and Cons

    New regulations for payday lenders from the CFPB have both sides of the issue up in arms.
  5. Personal Finance

    Title Loans vs. Payday Loans: Which Are Better?

    Both title loans and payday loans carry risks that outweigh the benefits.
  6. Personal Finance

    3 Tips For Using Payday Loans

    With payday loans now operating across 41 states, we tell you how to use them wisely and responsibly.
  7. Insights

    Could AIG or MetLife No Longer Be Too Big To Fail?

    The Treasury Department meets to address the 'too big to fail' categorization of nonbank lenders.
  8. Investing

    How Big Banks Are Slipping Back to Subprime Loans

    Big banks still face risks associated with subprime lending, albeit indirectly.
  9. Personal Finance

    Getting a loan without your parents

    Do you want to receive a loan without the help of your parents? Use these five tips to finance your dreams without banking on a second signature.
  10. Trading

    Car Title Loans: Good Option For Fast Cash?

    These loans provide fast cash, but they could leave you deeper in debt - and without a car.
RELATED FAQS
  1. What is the difference between an investment and a retail bank?

    Learn the primary differences between retail banks and investment banks by examining the business activities, type of clients ... Read Answer >>
Hot Definitions
  1. Inflation

    Inflation is the rate at which prices for goods and services is rising and the worth of currency is dropping.
  2. Discount Rate

    Discount rate is the interest rate charged to commercial banks and other depository institutions for loans received from ...
  3. Economies of Scale

    Economies of scale refer to reduced costs per unit that arise from increased total output of a product. For example, a larger ...
  4. Quick Ratio

    The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets.
  5. Leverage

    Leverage results from using borrowed capital as a source of funding when investing to expand the firm's asset base and generate ...
  6. Financial Risk

    Financial risk is the possibility that shareholders will lose money when investing in a company if its cash flow fails to ...
Trading Center