If you’re looking to open a bank account for your business, a personal checking account, or looking for a loan or investment opportunities, it’s important to be aware of the different types of banks you can do business with.
The banking industry is full of opportunities, but it can be a complicated place.
That’s why plenty of research must be done before getting started.
10 Bank Types to Know About
- Retail Banks
- Commercial Banks
- Investment Banks
- Credit Unions
- Private Banks
- Online Banks
- Savings and Loan Banks
- Shadow Banks
- Challenger Banks
Many different types of banks and other financial institutions function differently, offer different services, and provide different benefits.
In this article, we are going to go over a wide assortment of different types of banks.
We’ll dive deep into each bank type, picking apart their pros and cons, analyzing their benefits and key functions.
Let’s get started.
1. Retail Banks
Retail banks are the most common type of bank used by individuals and small businesses.
When you think of your local bank, it is most likely a retail bank.
Banks such as Chase Bank, PNC, and Bank of America are common examples of retail banks, however, these institutions also offer commercial banking in some cases.
These banks are either smaller, local banks or national banks with branches throughout the country.
Retail banks are commonly referred to as “consumer banks” because a vast majority of American consumers use retail banks to facilitate their daily financial transactions.
This type of bank can facilitate everything an individual would need from a financial institution, from daily transactions to personal loans and certain brokerage services.
Here are some of the services offered by retail banks:
- Bank Accounts: Retail banks are ideal for creating checking and savings accounts for individuals. Account minimums are relatively low, and so are the required initial deposits. There aren’t many fees associated with these accounts either, as long as you meet the account minimum balance and don’t overdraft.
- Loans: Retail banks are a popular destination for personal loans. Each bank will have different policies in terms of repayment and interest. You can also likely get auto loans and home equity loans depending on the bank and your credit history.
- Debit Cards: Debit cards are provided as a complimentary item with your bank account.
- Credit Cards: You can also apply to open a credit card for your bank account. The requirements for opening a line of credit depend on the bank and usually involve your account balance, deposit frequency, and credit history.
- Money orders and certified checks can also be made at retail banks.
- ATMs: All large retail banks will have ATM locations in most towns and cities. These ATMs are specifically designed for customers of that bank and carry no fees when transferring money through them.
- Wire Transfers: Money can be quickly transferred from one account to another within the same bank. These wire transfers are often completely free and will take effect instantly.
- Certificates of Deposit can also be issued from retail banks.
- Specialized Accounts: Lastly, retail banks are typically capable of making specialized accounts for different types of people. There are teen-checking accounts that can be opened with a parent, and there are specially designed accounts for college students as well.
- Notary services can also be facilitated through these banks.
Retail banks are ideal for those looking for a convenient personal banking solution.
Retail banks make it easy for consumers to open accounts, maintain them, and interact with their money.
2. Commercial Banks
The next type of bank we have is the commercial bank.
These banks are designed for business primarily, but individual consumers can also bank with a commercial institution.
JP Morgan Chase & Co., Wells Fargo, Citigroup Inc, and U.S. Bancorp all fall under the commercial banking umbrella.
Commercial banks give small to medium-sized businesses access to basic banking services.
Compared to retail banks, commercial banks carry a few more fees and expenses to use, however, they offer more financial services and products.
The economic purpose of commercial banks is to create capital, credit, and foster liquidity in the market.
Here are some of the products and services offered by commercial banks:
- Various Loans: Commercial banks can provide many different types of loans for different purposes. These loans include business term loans, commercial lending options, refinancing, and commercial mortgages.
- Cash Management Services: Commercial banks have treasury management solutions ideal for larger businesses. These services include market liquidity assessment, cash flow management, and investment management.
- Various Credit Products: Different types of credit lines can be opened through commercial banks, many of them suited for business purposes.
- Equipment Lending: Commercial banks usually offer their customers' equipment lending, leasing, or equipment financing. These are essentially loans that businesses can use to purchase necessary equipment. These equipment loans can be paid off through recurring monthly payments over a fixed period of time.
- Trade Finance: Commercial banks can significantly reduce the risk of international trade through trade financing. The bank can act as a third party that mediates any divergence between the exporter and importer.
- Commercial Real Estate: Commercial banks often own properties that can be leased to business tenants for conducting revenue-generating activities. These properties can range from a brick-and-mortar store to an entire shopping center. Most strip malls, retail stores, restaurants, and office spaces are likely to be owned by commercial banks.
- Foreign Exchange Services: Commercial banks support currency exchange and conversion. This coupled with trade finance makes commercial banks great for conducting international business.
- Notary services are also included.
For business purposes, both large and small can benefit greatly from banking through a commercial bank.
If a business needs to open an account, get a loan of any kind, access a line of credit, or convert funds for foreign markets, commercial banks are the way to go.
3. Investment Banks
Investment banks are a bit different from the other two on the list.
Their main function is actually to manage the trade of stocks, securities, and bonds between companies and their investors.
But on the other hand, investment banks act as financial intermediaries and advisors.
These banks often advise individuals and corporations that seek financial guidance.
Investment banks play major roles in the mergers and acquisitions of companies, working to reorganize acquired firms.
Additionally, investment banks manage the investment portfolios of businesses and individuals to raise capital for certain businesses and in some cases the federal government.
Investment banks are not like the Wells Fargo down the street, where you can open a checking account.
These banks are primarily designed for asset management, corporate finance, and trading.
Here are some of the services you can expect to receive from an investment bank.
- Corporate Finance: Investment banks are known to facilitate corporate finance for their clients. Investment banks guide corporations through managing sources of funding, capital structuring, and making investment decisions.
- Merger & Acquisition Assistance: Investment banks walk firms through the process of mergers and acquisitions. These banks play a major role in the M&A process by advising the firms involved to maximize the returns earned from the action. Investment banks evaluate merger proposals and assist the firms in arranging the financing for the deal.
- Raising Capital: These banks raise money for their clients through facilitating initial public offerings (IPOs), issuing and selling bonds on behalf of the client, and the sale of company shares to investors via private placements.
- Equity Research: Investment banks often produce reports, perform analysis, and make recommendations to their clients as to whether they should buy, sell, or hold investments that they are contemplating.
- The sales and trading of stocks, bonds, and various securities.
- Asset Management: Investment banks manage their clients' investments with the responsibility of appreciating the investment while mitigating risk. The bank will determine which investments should be made or avoided in the interest of building the portfolio of their clients.
Investment banks profit by charging commissions on returns and service fees for providing their extensive financial services.
Engaging with such banks is ideal for publicly traded companies and individual investors with enough capital.
4. Credit Unions
Credit unions are essentially non-profit banking institutions.
In their functionality, they are very similar to retail and commercial banks, and their services are targeted at individual consumers, startups, and small businesses.
Unlike other types of banks, credit unions only 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 so on.
Credit unions charge much lower fees than other banks, making them ideal for lower-income individuals and businesses.
Here are the services that credit unions provide:
- Issuance of Loans: Credit unions are best known for providing personal loans and business loans. These are only available to the clientele demographics that they serve. The advantage of these loans is how cheap they are to take out. The fees and rates are very favorable from credit unions. These loans range from auto loans to mortgage loans.
- Accounts: Customers of credit unions can open savings and checking accounts with their affiliated branches. Once again, the cost of banking through the union is low, as the account minimums and required fees will be low to non-existent.
- Credit Cards: Affiliates of credit unions can open lines of credit through the institution.
- ATM Services: Credit unions also feature ATM services, which are ideal for those who don’t qualify for debit cards and need access to their cash.
- Student Loans: Credit unions often dispense student loans with flexible repayment plans at relatively lower interest rates.
- Retirement Savings Accounts for qualifying elderly customers that are looking for a place to save their money.
- Secured Loans and Lines of Credit: Loans and credit cards for those with lower credit scores. This service serves as an opportunity for those with a poor credit history to rebuild their credit.
- Notary services can be carried out through a credit union.
Credit unions offer a host of great banking solutions for those who qualify for them.
There are some caveats when it comes to the services that credit unions offer, however.
The factors that affect the availability of credit unions include:
- The community served
- The demand for available services
- The current number of members at the credit union
- The goals of the controlling board
Credit unions are controlled by an elected board of directors pulled from their member pool.
This means that credit unions can differ in policy dramatically based on the composition of the board.
5. Private Banks
Private banks are designed exclusively for wealthy individuals that own at least $1 million in assets.
However, the minimum amount of cash required to open accounts varies from bank to bank.
Most private banks require their customers to be high net worth individuals, which the Securities and Exchange Commission defines as those who own a minimum of $750,000 in investable assets.
Investable assets include assets that are liquid or near liquid.
But even if you have the cash to get an account opened, a private bank account might not be the banking solution for you.
These banks are highly exclusive when it comes to which entities they allow to bank with them.
The financial products and services provided by private banks carry fees, and there are account maintenance fees to be aware of.
These fees, however, can be avoided by meeting a certain account minimum balance, which shifts from bank to bank.
Here are the services offered by private banks:
- Preferential Rates: The deposit accounts held with private banks enjoy higher APYs. Relative to other bank types, the fees charged by private banks could be lower. Additionally, private bankers could take advantage of preferential pricing on loans and mortgages.
- Comprehensive Financial Planning: Private banks often walk their customers through financial decisions. This financial counsel includes creating savings plans, analyzing the financial implications of major purchases, and so on.
- Investment Guidance: Private banks will also give investing advice to their customers, much like investment banks, private banks guide their customers on subjects like the sale and purchase of securities, stocks, and bonds, and asset allocation.
- Wealth Management: The broad umbrella of wealth management is included in the services of private banks. Everything from legal advice, estate planning, personal accounting, retirement planning, and tax guidance is provided to private bankers.
- Credit Services: Private bank customers can open lines of credit with their bank and enjoy lower rates compared to other bank types.
- Lending: Private banks also give out loans for their clients to ease the purchase of major luxury products or things like land, property, and so on.
Private banking is a highly advantageous and unique banking solution.
Opening an account with a private bank opens the doors to myriad financial tools, products, and services.
Private banks are essentially personal accountants and financial advisors that hold your money.
The catch is that you need to have enough cash to open an account and keep up with the account minimums.
If you are a wealthy, high-net-worth individual, private banks are ideal for you thanks to the long list of benefits they provide.
6. Online Banks
Some banks have no physical locations and exist entirely on the internet.
Online banks are a relatively new trend that maximizes convenience.
With an online bank, you can perform all of your banking needs from your smartphone.
This type of bank is highly popular outside of the United States, particularly in east Asia.
One of the most enticing features of mobile banking is completely contactless transactions.
You can use the app of the bank to read QR codes which will open a field through which you can purchase products.
Convenience is the primary perk of mobile banking.
Here are a few more:
- Fewer and Lower Fees: Since internet-exclusive banks don’t need to pay for the expenses of physical locations, customers of these banks enjoy savings. There are fewer fees associated with these banks. Most online banks don’t charge minimum balance fees nor overdraft fees. Any fees that do exist are almost guaranteed to be lower than competitors.
- Credit Services: Lines of credit can be opened through mobile banks. These will also likely charge competitive rates and lower fees due to the overall inexpensive nature of online banking.
- Simplicity: These banks are very simple. Most of them only offer basic checking and savings accounts, and some offer credit programs.
- Universal Access: Your bank will never be out of reach and that includes customer service, which can be reached remotely at any time.
Overall, mobile banks are highly convenient banking solutions that are easy to use and won’t cost much to use.
The only issue to be found with these banks is how limited their services can be in the absence of physical locations.
7. Savings and Loan Associations
Savings and Loan associations are technically not banks in the traditional sense.
These are mutually owned financial institutions that offer mortgages, refinance loans, and alternative home loans using deposited savings.
Also known as “thrifts”, the functions of the institutions vary, and some or publicly traded companies.
Here are the services you can expect from a savings and loan association:
- Accounts: You can open checking and savings accounts through savings and loan associations.
- Loans: Thrifts offer a wide variety of loans, and most of them are home and property-related
These are simpler institutions that are locality-oriented and encourage people to buy homes in certain areas.
8. Shadow Banks
Lastly, we’ll go over the Shadow Banking System.
If Shadow Banking sounds a little too shady for your liking, the industry is also referred to as Market-Based Lending.
This is a banking network that is not bound by the same regulations that other major banks need to comply with
The Financial Stability Board (FSB) has reported that Shadow Banking assets are estimated to be as high as $75 trillion.
Essentially, shadow banking is unregulated credit intermediation.
These institutions take money from savings accounts and investors and lend it to borrowers.
These transactions are known as shadow transactions only because they are not as regulated or held to the same scrutiny as the same transactions would be under other banks.
Shadow banks offer the following services:
- Credit Lines: You can open lines of credit with shadow banks. This credit is backed not by the treasury of a central bank, but by borrowed money from savings accounts and investors.
- Loans: Loans can be taken out of shadow banks. The source of the money is the same.
Again, shadow banks are not technically banks, however, they can offer some of the same services as actual banks but without the high government scrutiny that they undergo.
Many people transact through shadow banks, but it’s not everybody’s cup of tea since it can often lead to having a legal target on your back.
Neobanks is a new type of bank in which smaller, digital platforms perform the same services as retail banks, just without the retail presence.
Being completely online, these banks have low overhead and are therefore more likely to offer better features to customers that typical banks won’t offer.
This would include things like foreign exchange services, a multi-currency account, and more.
While Retail banks would offer these services too, only their top-tier clients are privy to these benefits.
With Neobanks, every account is treated equally.
The interesting thing about Neobanks is that a lot of them are not actually banks.
They will hold your money in a segregated account held by a real banking institution but the money is not loaned.
Instead, a small transaction fee or account fee is charged instead of the loan business.
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10. Challenger Banks
Challenger banks are called challenger banks precisely because they are challenging the traditional format of banking.
Challenger banks are more of a hodgepodge of many other bank types, so long as they are not traditional banks.
Challenger banks are not quite neobanks because they can also include shadow banks as well as other private banks like Mutual banks who buck traditional norms.
Challenger banks are often ones that are talked about in the news, but as of late are more likely new startup banks, or virtual banks, that are using technology to change how the banking world works.
Believe it or not, there are even more types of banks that we couldn’t cover in this article alone.
Banking is a multivariate service that includes much more than just checking accounts, savings accounts, and loans.
There are a lot of options for you when considering opening a bank account.
To ensure that you choose the best banking solution for your financial wants and needs, make sure to carefully consider your income, wealth, debt, and future.
Banks play many vital roles in the global economy, and it’s all powered by our money.
Choosing the right bank for your financial needs is an incredible way to get your money to work for you.