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7 Types of Banks and Their Features

A bank is a financial establishment or institution that deals with different types of money transactions. Banks are vital to a country’s economy as they help a single person with their assets as well as small and big businesses. Way back in the ancient times of Mesopotamia, it was discovered that the people stored assets and valuable items in the temples and royal palaces. Around 2000 BCE in Babylon, it was found that there were records that those valuable items could be transferred to anyone using a receipt that indicates it was properly and legally transferred. Some temples also were believed to store their valuables, as it was considered sacred and safe from misdeeds. Loans were also present during those times as well as traders that managed in buying and selling of goods, which improved their economy. Over time, merchant bankers were properly recognized. These merchants specialize in offering their services, such as doing other people’s payments and managing their assets.   

7 Types of Banks and Their Features

Banks can safely store customers’ money and can also lend money to them, with interest. There are plenty of benefits a bank provides, such as protection of money if a person decides to open an account using their bank. A small amount of interest is also given in compensation for letting the bank use the money for investments, such as loans. Banks are also transparent regarding customers’ accounts. Users can track their transactions, and can ask for assistance if a problem occurs. Additionally, they have debit cards that allow the user to withdraw any amount using an automated teller machine (ATM) and a credit card. Banks are important because it help a lot of people as well as businesses, and they can use it to make payments and any other transactions. Furthermore, banks lend money helping the economy in the process.

Listed below are the 7 types of banks and their features:

  • Credit Unions: A credit union is an institution that is non-profitable but gives the same basic benefits to its members.
  • Investment banks: An investment bank serves lots of large corporations, firms and buys shares to resell to investors, and even governments. 
  • Commercial banks: Commercial banks are the financial organizations that receive deposits, provide security to the account, and give loans.
  • Retail banks: A retail bank is a bank that only lends help to small businesses and companies and consumers. 
  • Savings and loan associations: The savings and loan and associations are an institution that mainly helps individuals with their residential mortgages or properties. 
  • Community development banks: The purpose of community development banks is to provide help to individuals that live in low socioeconomic places.
  • Online and neobanks: Online and neobanks are online banks without physical branches. The bank is popular because anything can be done online, and it is convenient and hassle-free.

1.Credit unions

Credit unions are a non-profit institution that is operated and owned by individuals who pool their money to run the credit union. It offers the same services as a normal bank, but credit unions offer their services at a lower interest rate. To acquire the benefits of credit unions, a person needs a membership. Shareholders will pool their money to help their members get a loan and obtain other services. The remaining money is then invested to earn interest. Credit unions provide high savings rates, lower interest rates on borrowing, and lower fees. These are good benefits that a member can get because the institution is not profiting on their savings, but still offers them a lower interest rate for any type of loans. However, credit unions have risks such as credit risk, interest risk, liquidity risk, and strategic risk. An example of these risks is credit risk, which means that it would be bad for the institution if one member stops paying what they owe, and it will greatly affect the assets of the institution. Nevertheless, many people are willing to take the risks because of the benefits they can get as long as they follow the rules of the institution.

2. Investment banks

Investment banks focus primarily on big corporations, governments, and firms to provide them with the complicated financial assistance that will help their client business grow. They also act as a bridge that is linked between the stockholder and the company. Investment banks do not take deposits of money because their main goal is to trade and sell the shares of a corporation to an investor. Investment banks find a possible investor to buy shares of the company. Their benefits also include finance and asset management, researching data about companies that will likely buy a share, and trading and sales of the shares for their clients. Despite its benefits, it also has a lot of risks to think about. An example of a main risk in investment banks is their market and liquidity risk. Market risk would mean a client might experience losses because of the changes in prices at the market. While liquidity risk stands for clients not being able to sell their shares at a reasonable price or even not selling the share at all. Regardless of these risks, investment banks still provide their clients with services that are beneficial to them, and it can outweigh the risks. 

3. Commercial banks

Commercial banks are financial institutions where individuals and businesses can do their banking. A commercial type of institution accepts deposits, opening, and checking of accounts, as well as getting financial assistance through loans. Commercial banks operate by profiting from their clients, from service fees, monthly service payments of clients, loans, and fees from safe deposit boxes. Through commercial banks, individuals can safely store and track their money, loans that can greatly help businesses; online banking transactions, can use automated machines using debit cards provided by a specific bank. These banks are also accessible to anyone as they have a lot of branches. However, clients still may face various risks in using a commercial bank. Some of these risks include credit risk, operational risks, and liquidity risks. Despite the risks, banks have their own risk management that will lessen the probability of the risks. 

4. Retail banks

Retail banks operate the same way as traditional banks, but only offer their services to public individuals. A retail bank provides basic bank services to individuals that wish to manage their money. Some of their service products also include term and fixed deposits, and foreign currency accounts. Retail banks also offer their customers debit cards, and credit cards to build credit scores that will allow a person to access better borrowing terms. Customers can also apply for different loans. The main risk of using a retail bank is credit risk, since it offers lots of loans that can lead to excessive debt. Operational risks can also happen to either employees or customers. What a retail bank can provide is the main reason a person uses its services.

5. Savings and loan associations

A savings and loans association is a financial institution that provides the necessary financial aid to the people. Their primary focus is on helping the customers to get mortgage loans to purchase a property. It also accepts deposits for savings accounts, and the organization will use it as an investment in what they lend to the responsible borrowers. Although their main focus is on mortgages and loans, savings and loan associations also give basic bank services. It has debit and credit cards that will help their customers increase their eligibility for loans. The risks that are associated with savings and loan associations are interest rates on loans, credit risks, and operational fraud. People use the organization so that they can get gain the funds needed to purchase a property. 

6. Community development banks

Community development banks are institutions that are operated by the private sector. The community development bank type of bank operates differently than any other bank because community development banks do not take money deposits from clients. They offer assistance for personal and business reasons, but their main objective is to lend help with lower interest rates to low-level socioeconomic places across a given area. It gives the less fortunate places to improve and catch up with other thriving places. They don’t focus on making a profit, but want everyone to thrive in a community. The risks of a community development bank are that it is prone to corruption from its employees. Community development institutions are a great help that did not focus on one individual, but on the betterment of everyone.

7. Online and neobanks

Online banking and neobanks are both banks that can be accessed online, but online banking is an action of a customer to access their accounts online without going to the bank’s physical branch. Meanwhile, neobanks are banks that do not have any physical branches and are completely available online. That’s why online and neobanks are banks that are most convenient for everyone who hates going out or does not have time. Due to neobank service being online, it gave them an opportunity to save more money, because of it they have a lower fee, and created plenty of products. It is also easy to create an account without signing any papers. Online and neobanks provide savings and checking accounts, payment, transfer of savings, financial education tools as well as budgeting help. The risk for online and neobanks is if their system are not protected by Federal Deposit Insurance Corporation. It is important that the user reads the terms and agreement before opening an account. Online banking is secure as long as it is under the Federal Deposit Insurance Corporation. User’s tend to use online and neobanks because of their convenience and smooth transactions.   

How does a Bank work?

A bank is a financial institution that manages the money of its clients. It works by securing the money deposits of the clients and offering them services. There are two types of clients a bank will have. They’re called a saver, and a borrower, a saver, is the one who deposits the money. Borrowers are clients that apply for loans, and if they have a good credit score they have a good chance of approval. When a borrower gets a loan, the bank will profit because of the interest that is associated with the loans. The money will be returned to the savers account and provide them with interest for letting the bank use their money for loan transactions. Users must understand what a bank is to be able to use the bank’s benefits to its fullest extent. Banks made everyone’s life much easier, because they help each person in dealing with money, investments, and properties. The assistance and services that they provide to the public will also help the economy by exchanging goods. Banks are also responsible for making the money for its country and can exchange money to foreign currency. It is also highly protected by the Federal Reserve System and then guarantees that a certain bank is following the rules and regulations of the country. For more information, read What is a bank?

What kind of financial institution do most people deal with?

The most common financial institution the public uses is commercial banks. It is because commercial banks offer lower service fees that enable clients to keep their accounts open without worrying about them being closed. Their services are not limited as they offer plenty of products to their clients. They provide savings protection, CD investments, properties, and business loans, as well as advanced banking technology. These benefits helped their clients improve the way they manage their money and investments.

Which type of bank is popular in America and UK?

The type of bank that is popular in America and the UK is commercial banks. The reason for it being popular in these countries is that it provides excellent products that are suitable for almost everyone. There are a lot of businesses and large corporations in these countries, and when they use a commercial bank, it offers them liquidity in the market and gives them more advantages in managing their assets.

What are the types of Banking System?

Banks offer financial assistance to anyone, and they take the deposits of their clients, secure their funds, and then offer loans and other benefits to customers. There are a lot of different types of banking systems, and it serves different purposes. The three main banking systems of a bank, are the unit, branch, and group banking. Banks that are small, independent and located in a secluded place and that don’t have any other branches are called unit banking. However, branch banking has a variety of services, which are provided to all branches of the bank. Meanwhile, the group banking system is offering a benefit to their group of employees.

Are commercial banks non-profit?

No, commercial banks are profitable banks. It gains through profiting from the services charges they give to the customers. It is possible because of their low charges that enable them to attract more people to open an account with their bank. Commercial banks also get high interest on the loans that were given to their clients.

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