What are the different types of financial institutions?
When it comes to consumer banking, there are many types of institutions that provide financial services – not just banks like Bank of America or Wells Fargo. Instead, the American banking system is quite diverse and large. Broadly speaking, financial institutions can be broken down by:
- Banks: for-profit financial institutions generally regulated by the Federal Deposit Insurance Corporation (FDIC), Federal Reserve, or Office of the Comptroller of the Currency (OCC). Banks can be further segmented based on size and the geographical markets in which they operate, and include:
- Big banks (e.g., Top 10 banks)
- Regional banks
- Community banks
- Internet/Direct banks (Branchless)
- Credit unions: not-for-profit financial institutions that are different from banks because they are member owned and return their earnings to members in the form of better financial terms for consumers (e.g., lower loan rates, higher interest on deposits); members who have accounts with them are owners of the credit union. Federal credit unions are regulated by the National Credit Union Administration (NCUA). State credit unions are regulated by individual states, but may insure their accounts through the NCUA.
- Comparing financial institutions – the table below highlights some key differences across financial institutions types:
|Big banks||Regional banks||Credit unions||Direct Banks/Internet Banks|
|Examples||Chase, Bank of America, Wells Fargo||PNC Bank, BB&T, Fifth-Third||Alliant Credit Union, Navy Federal, Patelco||ING, Everbank, Ally|
|General definition and attributes||Assets > $1,000 billion, national market, one-stop shop for financial services and products||Assets > $10 billion, operate in regional markets||Not-for-profit and member owned; credit unions have membership/eligibility requirements||No branches (no live tellers), online banking only and phone service only, accounts generally available in all 50 states|
|Widely available branches/ATMs?||✔||✔||✗*||✗|
|Location of branches/ATMs||Across the country, national markets||Within regional markets||Typically only within local/regional markets; *note: some credit unions participate in networks with nationwide ATM access (without surcharges)||No branches; part of ATM networks (e.g., Allpoint)|
|Customer service||24/7 service availability, less personal, better online technology||Varies||Personalized service, service hours more limited. Technology lags behind big banks||24/7 service through phone and web, better online technology|
|Financial terms (fees and rates)||Standardized account offerings, stricter requirements/higher fees, lower interest rates on deposit accounts||Similar to big banks, but more diverse account offerings and terms||Lower fees and less strict requirements||Lower fees, higher interest rates on deposit accounts (e.g., savings account)|
With so many types of institutions to choose from, which one do you pick? The answer depends on weighing factors that you value most:
- Convenience: Having ATMs and branches everywhere and in easy-to-find places that you live, work, play, and travel. Quick guidance >> Big banks and regional banks
- Money in your pocket: Getting the most bang for your buck by minimizing fees paid for account services and maximizing interest rates earned on deposit accounts like savings, interest checking, etc. >> Internet banks and credit unions
- Customer service: Having access to bank service representatives that know your needs, are friendly and helpful; relationship banking instead of transactional banking >> Community banks and credit unions
- Other attributes: Picking a bank that is active in your local community and that gives back to the community, other non-monetary considerations >> Community banks and credit unions
Keep in mind, the above recommendations are generalized and are meant to be a quick guide. You should figure out the financial terms and conditions that make the most sense for you (paying lowest fees, earning competitive interest rates) and weigh them against a list of soft qualities that you value (customer service, community development, technology).