11 Types of Banks, How It Works and Who They're Best For

If you're looking to open a business bank account, a personal account, or looking for a loan or investments, it's essential to know about the different types of banks you can do business with.

This is because different banks and other financial institutions operate differently, offering different services and providing different benefits. Therefore, it's essential to conduct thorough research before choosing which bank to partner with or use.

In this article, we will discuss the different types of banks and their key features and provide some insight into which type of bank is most suitable for you.

What is a Bank, and How Does It Operate?

Before exploring the different types of banks, it's essential to understand the basic concept of a bank.

Banks are financial institutions authorized to accept deposits and provide credits. Along with fundamental functions, they offer an array of services, including:

• Credit cards.
• Check-cashing services.
• Wealth management services.
• Insurance.
• Business banking.

The core operation of banks involves using customer deposits as a base for lending. Banks lend these funds to other customers at a higher interest rate than they pay on deposits. This interest rate spread is a primary source of their profit.

Additionally, banks generate revenue through service fees and charges, including account maintenance, transaction fees, and specific service charges like overdrafts and wire transfers.

This operational model positions banks as vital intermediaries between savers and borrowers. They facilitate the circulation of money within the economy, contributing significantly to both financial growth and stability.

How Are Banks Regulated?

Banks are regulated by government bodies and the central bank to ensure safety, ethical operations, and financial stability. These regulations include capital adequacy and liquidity requirements, ensuring banks maintain sufficient reserves and liquid assets. In addition, risk management protocols are also mandated, along with regular audits, to guarantee compliance.

Consumer protection laws play an integral role in banking regulation. These laws are designed to safeguard customers from unfair banking practices and ensure transparency. Moreover, banks often participate in government-backed insurance schemes, such as the FDIC in the U.S. This scheme covers deposits up to USD250,000 per depositor per bank to protect depositors in case of bank failures. These regulations ensure that banks operate responsibly and in the public and economic interest.

1. Retail Banks

Retail banks, also referred to as consumer banks or personal banks offer banking services that cater to individual needs. These banks can facilitate most banking services, including savings, regular transactions, personal loans, debit and credit cards, and brokerage services.

Despite being widely used by the general public, retail banks also provide business bank accounts and are sometimes used by small businesses.

Small businesses may opt for retail rather than commercial banks due to eligibility issues such as a lack of required credit history or revenue. Additionally, they may prefer the convenience of retail banks, which have more locations and longer working hours than commercial banks.

Examples of Retail Banks

According to Statista, the top 5 most valuable retail banking banks worldwide as of February 2023 are

1. Industrial and Commercial Bank of China (ICBC)
2. China Construction Bank
3. Agricultural Bank of China
4. Bank of China
5. Bank of America

You may notice that 4 out of 5 of these banks are Chinese banks. This is because China is leading the global banking industry regarding banking brand value.

Key Services Offered By Retail Banks

Pros and Cons of Retail Banks

Who Should Use Retail Banks

✅ Individuals who need a personal bank account, and common financial services like debit and credit cards, and access to ATMs.

✅ Smaller companies that need a business account to start up their business. Retail banks have more branches for convenient access and physical support.

✅ Small businesses that need loans to support their growth as retail banks offer credit facilities with relatively low eligibility criteria.

📌 Note: If you own a business, it's advisable to separate your personal and business accounts to manage your business finances effectively.

2. Commercial Banks

Commercial banks are designed for businesses and for commercial purposes, typically offering essential banking services to small and medium-sized businesses.

Compared to retail banks, commercial banks carry a few more fees and expenses to use, but they also offer more financial services and products.

Examples of Commercial Banks

• BNP Paribas
• Standard Chartered
• U.S. Bancorp
• Wells Fargo

Key Services Offered By Commercial Banks

Pros and Cons of Commercial Banks

Who Should Use Commercial Banks

✅ Businesses, both in smaller and larger sizes, that need access to more corporate banking services such as foreign exchange and trade financing.

✅ Companies in need of financing through loans to support their businesses.

3. Investment Banks

Investment banks are a bit different from the other two on the list.

Their main function is to manage the trade of stocks, securities, and bonds between companies and their investors.

Investment banks also specialize in complex services such as underwriting, corporate finance advice, and managing investment portfolios to raise capital for businesses and, in some cases, the federal government.

Additionally, they play major roles in the mergers and acquisitions of companies, working to reorganize acquired firms.

Typically, the type of customers with investment banking are high-profile companies and individuals.

Examples of Investment Banks

Among the banks, here are those with the highest revenue from investment banking in 2023, according to Statista:

1. J.P. Morgan
2. Goldman Sachs
3. Bank of America
4. Morgan Stanely

Key Services Offered by Investment Banks

Pros and Cons of Investment Banks

Who Should Use Investment Banks

✅ Large incorporations, institutional investors, and governments looking for assistance with larger and more complex financial transactions and investments.

✅ Companies in need of insights and strategic decisions involved with capital markets and valuations.

✅Those seeking strategic counsel for mergers and acquisitions to enhance their market position.

4. Universal Banks

Universal banks offer a combination of retail, commercial, and investment banking services under one roof. These banks cater to a wide range of financial needs, from individual savings accounts to corporate finance and investment advisory.

The concept of universal banking is particularly significant in the United Kingdom and the United States. Historically, these countries clearly distinguished between pure investment banks and commercial banks. In the U.S., this separation was initially mandated by the Glass-Steagall Act of 1933. Over time, however, the regulatory barriers have been mainly dissolved, leading to the rise of universal banks in both regions.

In other regions, particularly those that follow European banking practices, the distinction between investment and commercial banks is less clear. As a result, larger banks often operate as universal banks, while smaller institutions specialize as commercial or investment banks.

Examples of Universal Banks

• Barclays
• Citigroup
• Credit Suisse
• HSBC
• JPMorgan Chase & Co.

Key Services Offered by Universal Banks

Pros and Cons of Universal Banks

Who Should Use Universal Banks

✅ Clients who prefer the convenience of managing all their banking needs — from personal savings to investment advice — through a single, trusted institution.

✅ Entrepreneurs and businesses can streamline their financial management and receive support for their growth–all in one place.

5. Credit Unions

Credit unions are types of financial cooperatives that offer typical banking services but operate as non-profit institutions and are owned by their members.

They have been a consistent alternative to traditional banking for many. As of November 2023, the membership of credit unions has increased to 141.3 million, according to the Credit Union National Association.

In their functionality, they are very similar to retail and commercial banks, and their services are targeted at individual consumers, startups, and small businesses. The difference is credit unions mainly serve people affiliated with certain groups, such as people living in a certain region, those living in low-income communities, active members of the military or military veterans, and more.

As member-owned and not-for-profit organizations, credit unions typically offer better interest rates on loans and savings accounts than traditional banks. Moreover, they are able to charge lower fees because they are exempt from Federal and most state taxes. However, credit unions are still responsible for certain tax obligations, including payroll and property taxes.

Examples of Credit Unions

Some of the more notable credit unions include

• Alliant Credit Union
• Navy Federal Credit Union
• Bethpage Federal Credit Union

Key Services Offered by Credit Unions

Pros and Cons of Credit Unions

Who Should Use Credit Unions

✅ Individuals looking for a banking option that provides more affordable loan services and support from a local financial institution.

✅ Those who are looking to deposit their money and earn a higher interest rate than traditional savings accounts offer.

✅ Customers within a specific demographic or group (e.g. by profession, community, organization) that want a more personalized banking option.

6. Private Banks

Private banks are designed to be, from their name, private. Regular individuals may not be familiar with or come across many private banks because they cater to high-net-worth individuals, like CEOs of larger corporations or someone with minimum liquid assets of USD 1 million.

However, the minimum amount of cash required to open accounts varies from bank to bank.

The financial products and services provided by private banks, such as account maintenance, carry fees. These fees can be avoided by meeting a certain account minimum balance, a requirement that differs from one private bank to another.

Examples of Private Banks

• JP Morgan Private Bank
• UBS Wealth Management Bank.
• Morgan Standley Private Bank
• Citi Private Bank

Key Services Offered by Private Banks

Pros and Cons of Private Banks

Who Should Use Private Banks

✅ High-net-worth individuals or families looking for more in-depth financial advice and personalized services.

✅ High-net-worth customers looking to make more strategic financial decisions regarding investments, estate planning, and wealth management.

7. Savings and Loan Associations

Savings and Loan Associations (S&Ls), also known as Thrift Banks, are mutually owned financial institutions that offer mortgages, refinance loans, and alternative home loans using deposited savings.

Although S&Ls are not banks in the traditional sense, as they focus on home financing, they also provide limited lending services to businesses, savings accounts, and different types of deposit accounts.

By law, S&Ls are required to maintain at least 65% of their loans to consumers on housing-related terms, which is why their services to businesses are slightly fewer than those of individuals.

Examples of Savings and Loan Associations

• Capital One 360
• Synchrony Bank

Key Services Offered by Savings and Loan Associations

Pros and Cons of Savings and Loan Associations

Who Should Use Savings and Loan Associations

✅ Customers who are looking for a more community-oriented banking experience and are looking to buy a home.

✅ Customers who want to save a little more on fees and earn with higher interest rates on savings

8. Islamic Banks

Islamic banks operate in strict adherence to Sharia, or Islamic law, setting them apart from conventional banking systems. Central to Islamic banking is the prohibition of interest (Riba), as Islam views lending with interest as exploitative. Therefore, Islamic banks employ alternative methods to generate revenue, such as equity participation, where profit and loss are shared with clients. This means if a bank finances a business, it shares in the profits rather than charging interest and similarly bears a portion of losses if the business struggles.

Islamic finance also avoids investments in businesses engaged in prohibited (Haram) activities like alcohol or pork production, adheres to strict prohibitions against speculative transactions (Maisir), and rejects contracts with excessive uncertainty or risk (Gharar).

These principles ensure that each transaction is tied to a tangible asset or service and that risks and profits are equitably shared. This approach leads Islamic banks to adopt more cautious investment strategies, typically avoiding high-risk ventures that could lead to economic instability or speculative bubbles.

Examples of Islamic Banks

• Al Rajhi Bank
• Bank Pasargad
• Dubai Islamic Bank
• Kuwait Finance House

Key Services Offered by Islamic Banks

Pros and Cons of Islamic Banks

Who Should Use Islamic Banks

✅ Individuals and businesses seeking Sharia-compliant banking services.

✅ Investors interested in ethical and interest-free financial products.

9. Green Banks

Green Banks are financial institutions that prioritize environmental sustainability and combating climate change. They differ from traditional banks by focusing on funding renewable energy, energy efficiency, and other green initiatives, rather than maximizing profits.

These banks are established by governments at various levels, with a clear mandate to meet specific environmental targets. Their key goals include mobilizing private investment, reducing energy costs, advancing green technologies, and promoting community development.

Examples of Green Banks

• New York Green Bank
• Technology Fund
• Green Investment Bank
• Clean Energy Finance Corporation

Key Services Offered by Green Banks:

Pros and Cons of Green Banks

Who Should Use Green Banks:

✅ Individuals who are interested in funding options for making energy-efficient improvements to their buildings, or making a switch to electric vehicles.

✅ Entrepreneurs developing renewable energy initiatives or sustainable products who need capital for research, development, or expansion.

✅ Local governments or community groups looking to fund public projects such as green infrastructure improvements.

10. Challenger Banks

Challenger banks, also referred to as Online banks, Digital banks, or Virtual banks, are banks that challenge the traditional methods of banking.

They offer most of the services that traditional banks do, but primarily through digital channels.

Many challenger banks don't set up physical branches, while a few still maintain a limited number of physical locations.

From 2016-2019, the search for Challenger banks online increased by 32%, while the search for traditional banks decreased by 22% during the same period. An increasing number of users have started considering this option, mostly due to the challenges that they may face with traditional banks.

Because they challenge the traditional ways of banking, there have been doubts about their security and legitimacy. However, many online banks have authorized banking licenses in the countries where they operate, so they are regulated by respective local authorities. These banks have been a growing trend that focuses on improving their services through innovation, technology, and convenience.

Examples of Challenger Banks

Some of the most popular challenger banks include

• Revolut
• N26
• Monzo
• Starling Bank

💡Tip: Are you curious to learn more about their business accounts and fees? Read our in-depth review of Revolut, N26, Monzo, and Starling Bank.

Key Services Offered by Challenger Banks

Pros and Cons of Challenger Banks

Who Should Use Challenger Banks

✅ Tech-savvy individuals or businesses who prioritize convenience and ease of access to banking.

✅ Customers who travel often and need access to their bank accounts from wherever they are.

💡 Did You Know? Hong Kong has 8 Licensed Virtual Banks that you can choose from.

11. Neobanks

Neobanks is a new type of bank in which smaller, digital platforms perform the same services as retail banks, just without the physical presence.

Neobanks operate exclusively online and focus on improving through technology and convenience.

Though there are still some reservations regarding neobanking, the trend in its use is growing worldwide. According to Statista, the number of users who will have adopted neobanking is estimated to grow to over 370 million by 2027.

Being completely online, these banks have low overhead and are, therefore, more likely to offer unique features that typical banks won’t offer, such as foreign exchange services, a multi-currency account, and more. 

Many of the neobanks are not banks. They don't hold banking licenses, but rather financial licenses such as a Money Service Operators License in Hong Kong and a Payment Service Provider Licence in Singapore, which allow them to provide cross-border payment services.

📌 Note: Neobanks normally hold your money in a segregated account held by a real banking institution.

Examples of Neobanks

• Chime
• Varo
• Lunar

💡Tip: Check out our article to discover the top 19 neobanks in the market.

Key Services Offered by Neobanks

Pros and Cons of Neobanks

Who Should Use Neobanks

✅ Customers who are looking for an innovative way of banking through advanced features and an intuitive user experience.

✅ Small businesses that tend to be overlooked and discredited by banks and are unable to open a business account for their company.

Challenger Banks vs. Neobanks

After discussing both Challenger banks and Neobanks, the two types might appear the same. However, they do have slight differences, which we will summarize below.

Challenger banks typically offer a full range of banking services and products, as they hold a banking license granted by their local regulatory authority. This means that they operate like traditional banks and are bound by the same regulations.

Many of them are also covered under local deposit insurance schemes, such as the Financial Services Compensation Scheme (FSCS) in the UK. As a result, they are free to use the word 'bank' in their name without restrictions.

On the other hand, neobanks usually offer limited banking and financial services due to the nature of their license. Most neobanks don't carry an official banking license. Rather, they carry Payment Services licenses (like the Payment Service Provider License in Singapore) that allow them to provide payment services across customers.

The lack of a banking license means that the funds kept with the institution are not insured to the degree of traditional banks. This also means that they cannot use the word 'bank' in their name.

It's important to take note of the licenses of such companies to have a better understanding of the products they offer and the services provided.

💡Tip: We have you covered if you want a more in-depth comparison between challenger banks and neobanks.

Have a Business in Asia? Consider Statrys

By now, you should have a clearer understanding of which type of bank could potentially suit your financial needs. If you own a business in Asia or are considering entering the Asian market, then we recommend you consider Statrys.

Statrys is not a bank but a fintech company holding a Money Service Operator license in Hong Kong. Statrys provides various financial services to businesses incorporated in Hong Kong, Singapore, and the BVI.

Key Services Offered by Statrys

• The multi-currency business accounts that can hold 11 major currencies.
• Local payout in 13 different currencies.
• Virtual and physical business cards have built-in controls to manage expenses and cash withdrawals through ATMs.
• FX services with competitive exchange rates (spot and forward contracts).
• Xero integration to save time and resources using automated accounting.
• A dedicated account manager for every client.

With its responsive human customer service, Statrys has received a score of 4.6/5 from over 200 reviews on Trustpilot.

Moreover, the application process for opening an account with Statrys is simple and fast, with 85% of its customers being able to open an account within 3 business days.

If you own a growing business and have clients and partners in Asia, be sure to check out Statrys' business account to see how Statrys can support your business with payment.