Banking Essentials, Various Bank Categories, and Selecting the Optimal Bank for Your Needs
In the world of finance, there are three primary types of banks that cater to various clients and provide distinct financial services: retail banks, commercial banks, and investment banks.
Retail banks, the backbone of everyday banking, serve individual consumers by offering basic banking services such as savings and checking accounts, personal loans, mortgages, and credit cards. Their primary focus is on meeting the financial needs of the general public and ensuring financial inclusion.
Commercial banks, on the other hand, primarily serve individuals, businesses (small to large), and corporations by accepting deposits and providing loans like business credit lines, mortgages, and other deposit accounts. Their main function is to facilitate financial transactions and credit for economic development, dealing mostly with lower-risk products.
Investment banks, however, cater to large corporations, institutions, and governments, helping them raise capital through underwriting stock and bond issues, advising on mergers and acquisitions, and managing large-scale financial transactions. Investment banks engage in more complex, higher-risk activities related to the capital markets.
Here's a brief comparison of these three types of banks:
| Aspect | Retail Banks | Commercial Banks | Investment Banks | |-----------------------------|-----------------------------------|----------------------------------|-------------------------------------| | Primary Clients | Individual consumers | Individuals and businesses | Corporations, institutions, governments | | Main Services | Savings/checking accounts, loans, mortgages, credit cards | Deposits, business and personal loans, mortgages | Capital raising, M&A advisory, underwriting | | Risk Level | Low | Low to moderate | High (market and deal risk) | | Revenue Sources | Interest, fees | Interest, fees | Deal commissions, advisory fees | | Regulation | Regulated by central banks | Heavily regulated by central banks | Regulated by securities authorities, subject to securities laws | | Focus | Everyday banking for individuals | Banking services for masses and businesses | Capital market transactions and advisory |
Retail banks also provide access to investments in CDs, mutual funds, and individual retirement accounts (IRAs). When choosing a retail bank, it's essential to check the fees associated with the accounts you want to open, including interest on loans, monthly maintenance fees, overdraft fees, and wire transfer fees. Other factors to consider include the size of the bank, the services offered, and the fees associated with accounts and loans.
The Federal Deposit Insurance Corporation (FDIC) insures deposits in U.S. banks and supervises and examines banks to ensure that the money they handle is safe. A smaller bank may offer more personalized customer service and the products you prefer. Credit unions, not-for-profit institutions created for and managed by their members or customers, also offer banking services.
Some large banks are moving to end overdraft fees in 2022, making them a more attractive option for some consumers. Large retail banks are often well-known, big-name banks and have locations throughout the U.S., which is convenient if you travel often for work or vacation.
SIPC protects your account for up to $500,000 in securities, including a limit of $250,000 in cash in your account. Examples of commercial banks include JPMorgan Chase and Bank of America. Credit unions provide routine banking services to their clients, who are generally called members, and tend to have fewer locations and automated teller machines (ATMs) compared to banks.
Commercial or corporate banks tailor their services to business clients, offering credit services, cash management, commercial real estate services, employer services, and trade finance. Investment banks focus on providing corporate clients with complex services and financial transactions such as underwriting and assisting with merger and acquisition (M&A) activity.
A community bank takes deposits and lends locally, which could offer a more personalized banking relationship. Choose a convenient location if you are choosing a bank with a brick-and-mortar location. When choosing a bank, consider whether you want to keep both business and personal accounts at the same bank or separate banks, whether you prefer a traditional bank or an online bank, and whether you need personalized customer service or a more convenient location.
The insurance maximum is $250,000 per depositor, per insured bank, for each account ownership category. Larger retail banks cater to high-net-worth individuals with specialty services such as private banking and wealth management services. When choosing a bank, it's crucial to evaluate your specific needs and preferences to find the best fit for you.
- While retail banks primarily serve individual consumers and provide personal financial services like savings accounts, commercial banks also cater to businesses and offer credit services, a type of service known as 'liquidity' in the world of finance.
- As regulation is essential to ensure safety in the financial sector, retail banks are supervised by central banks, while commercial and investment banks are subject to securities laws and oversight from securities authorities.
- In the realm of personal finance, some large retail banks are moving towards ending overdraft fees, and by doing so, they aim to attract more customers, demonstrating the role of 'defi' in evolving traditional banking practices.
