What are common types of banks, and which is right for me?

Customer withdrawing money at a bank counterImage: Customer withdrawing money at a bank counter

In a Nutshell

There are many different types of banks and financial institutions that offer similar services. Understanding how different banks are structured and how they serve the community is key to helping you find the perfect fit for your money.
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Different types of banks and financial institutions offer products and services to meet the needs of individuals, families, businesses and large organizations.

Even a single type of bank might offer different types of bank accounts, including checking, savings and money market accounts. We’ll take a high-level look at some different types of banks in the U.S., along with a few types of financial institutions (such as credit unions) that offer similar financial services. Plus, we’ll explore how banks make money and what to consider before opening an account.

What are some different types of banks?

Banks may fall within a particular type depending on how the bank was created or chartered, what its focus is and who its target customers are. In general, “commercial bank” is a broad term for for-profit, FDIC-insured organizations that accept customer deposits and offer lending products — this is what most people think of as a bank.

From this broad term, banks (and financial institutions offering similar services) can be broken down into several smaller categories, including retail banks, savings and loan associations, community development banks and neobanks.

Retail banks

Retail banks, also known as consumer banks, are commercial banks that offer consumer and personal banking services to the general public. Most retail banks offer checking accounts, savings accounts and retirement accounts.

Consumer banking institutions may also offer different retail credit products to individuals and families, such as auto loans and credit cards. Institutions chartered as community, regional or national banks can all offer retail banking services directly to consumers.

Commercial banks

Some banks — or departments within banks — focus on serving corporate, nonprofit and government clients. These banks are often called business or commercial banks as a reference to their customer base. Often, commercial banks offer special financing and loan products for businesses, such as commercial real estate and equipment loans.

Community development banks

Community development banks, sometimes referred to as CD banks, are privately owned banks that focus on social responsibility and may receive support from the federal government. These banks are created to primarily help underserved communities with financial services, including access to deposit accounts and credit.

Investment banks

Instead of focusing on lending, investment banks make money through investing either their own money or a client’s money. For example, an investment bank may help clients with mergers and acquisitions, or help a private company go public through an initial public offering.

Online and neobanks

Many of the companies that you may think of as online banks — also called neobanks or virtual banks — aren’t actually banks. These tech-forward companies create attractive and easy-to-use interfaces for consumers and may offer a variety of perks. But they generally partner with a traditional bank that holds customers’ deposits and manages the behind-the-scenes finances.

There are a few exceptions, though — online banks are starting to get approved for national charters or purchasing small banks that already have a national charter. And traditional brick-and-mortar banks can offer online-only bank accounts or create online-only bank brands.

Credit unions

A credit union is a financial institution that’s cooperatively owned and run by its members. Like banks, these not-for-profit organizations also accept deposits and offer loans. But unlike banks, credit unions pass earnings on to members rather than shareholders.

You may find that credit unions offer fewer fees, lower interest rates on loans and higher rates on your savings. Membership is often limited to people who have a link to the credit union, such as living or working in a particular area.

Savings and loan associations

Savings and loan associations, also known as thrifts, are a type of financial institution that focuses on helping people become homeowners. Unlike banks, which are solely owned by shareholders, customers and shareholders can mutually own a thrift.

Historically, there were limitations on the types of products a thrift could offer. Today, you may find that thrifts and banks offer similar types of consumer accounts. But federal laws have traditionally limited the types of commercial accounts and business loans they may participate in. Today, there aren’t nearly as many thrifts as banks, partially due to their decline following the S&L crisis in the 1980s.

How do banks work?

In general, banks often work as a financial intermediary by indirectly connecting people who need a safe place to store their money with people who need to borrow money. As depositors trust their funds to banks or credit unions in various accounts, the financial institution will in turn make loans to individuals, families or businesses making major purchases, such as houses and cars.

Banks can attract customers by paying interest on the money kept at the bank, such as the funds in your savings account. And banks make most of their money from the interest and fees on the loans they issue.

What to know about nonbank lenders

There are some financial institutions that offer loans but don’t accept deposits and aren’t banks. Common examples include nonbank mortgage lenders and payday lenders. Online, you can also find consumer and small business loans from nonbank lenders and peer-to-peer lending platforms.

Working with a nonbank lender isn’t necessarily dangerous, as nonbank lenders are still subject to many state and federal lending laws. But if you’re unfamiliar with the company, you may want to look up reviews of the business. Some scammers pose as lenders to collect “fees.”

Next steps: Choosing a type of bank that’s right for you

In many cases, finding the right account depends less on the type of financial institution than the specific account’s services, features and fees.

For instance, if you’re looking for a high-yield savings account, you may want to focus on the account’s annual percentage yield, and whether there are activity or minimum balance requirements. If you can earn a lot of interest, it might not matter whether you’re storing your money at a bank or credit union.

But in general, you’ll want to make sure your account is insured by either the FDIC (for banks) or NCUA (for credit unions). The insurance covers up to $250,000 in deposits, which stands as a federal guarantee that you’ll receive your money if the bank or credit union goes under. For details, visit the FDIC’s FAQ page or see the NCUA informational booklet.

About the author: Louis DeNicola is a personal finance writer and has written for American Express, Discover and Nova Credit. In addition to being a contributing writer at Credit Karma, you can find his work on Business Insider, Cheapi… Read more.