Banks 101

May 18, 2022

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What is a Bank?

A Bank is a financial institution that is licensed to accept deposits and make loans. Banks can also provide financial services like money management, currency exchange, and secure deposit boxes. There are many different types of banks, including retail banks, corporate or commercial banks, and investment banks. Banks are governed by the country’s government and central banks.

Bank sign on a marble background. 3d illustration

Understanding Banks

Banks are an essential element of the economy as they offer critical services to both businesses and consumers. As financial service providers, they offer you a secure location to keep your money. With a range of accounts, including savings and checking accounts and the certificates of deposits (CDs), they allow you to perform routine banking transactions such as deposits, withdrawals, check writing, and payment for bills. You can also conserve your money and earn interest from your investments. The funds stored in many banks are federally protected through the Federal Deposit Insurance Corporation (FDIC) for up to $250,000 for individuals’ depositors and $500,000 for joint deposits.1

The bank will lend the money you deposit to the bank – short-term cash–to other banks for long-term loans like car loans, mortgages, credit cards, and other debt-related vehicles. This helps to increase liquidity in the market. This generates money and keeps the supply running. They also offer credit options for both corporations and individuals.

As with all businesses, one of the main goals of banks is to generate profits for their shareholders. For the majority of banks, their directors are the shareholders. They do this by charging higher interest on loans and other debts they offer to borrowers than they charge to those who use their savings accounts. For instance, a bank that offers 1% interest on savings accounts and charges 6% interest on loans generates a net gain of five percent for its shareholders.

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How does a bank function?

In simple terms, a bank is a company that uses the money customers deposit into their savings and checking accounts to fund loans for both businesses and individuals. Banks typically make money from the interest they earn from their loans and pay part of it back to their customers in interest on savings accounts.

For a bank to operate, it requires a charter or license overseen by a regulatory. Within the U.S., there are national, and state charters that depend on the reach of a bank, and the three primary regulators of banks comprise The Federal Reserve, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation. Suppose you feel that a bank has unfairly treated you. In that case, you can file complaints to the supervisor or with the Consumer Financial Protection Bureau.

Banks do not offer financial services, including mail-orders at post offices, gift cards sold at retail stores, and wire transfer and cash-in-check services available at Western Union locations. If the bank fails, you can get your money in savings and checking accounts. However, only banks are covered by FDIC insurance when you want to store your funds securely.

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Nonbank organizations, like online brokers and neobanks, can collaborate with banks to provide their customers with FDIC-insured accounts, including checking accounts and cash management accounts.

Type of Banks

There are a variety of technical classifications — commercial bank, savings bank, etc. However, the most straightforward method to think of banks is to group them based on their size as well as whether or not they are branch-based they do not. Here’s a quick breakdown:

National Banks

National banks are among the largest U.S. banks with large ATMs and branches, robust mobile applications, and a wide range of products and services for business, the general public, and large commercial clients. The phrase “national bank” can refer to brick-and-mortar banks or online-only ones. (Learn the details about banks that are national and the 20 biggest banks across the U.S.) There are also international bank divisions.

Regional banks

Regional banks are mid-sized institutions focused on particular regions of the country. They can have branches in several states.

community banks

Community banks can be described as local, small institutions that may be the only bank that is physically located in an area, particularly in rural areas.

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Online banks

Online banks are online-based businesses that allow customers to interact with them via websites and, typically though not necessarily, through a mobile application. They do not always provide all kinds of accounts and loans that you’ll find in traditional brick-and-mortar banks. (See more on online banks. )

Another type of bank you’ll read about in the news could affect your financial situation and personal finances even if you’re not able to join as a client:

Central banks

Central banks are banks run by bankers that allow a country’s financial system to function by setting monetary policy and generating money and other activities. Central banks are the U.S.’s Central banks, called the Federal Reserve. A central bank’s actions directly affect you, like when the Fed increases its interest rates. If Fed rates rise, it is possible that the rates for savings and mortgages rates to increase. (Read more about Fed rate rises. )

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How are banks regulated?

U.S. banks were under examination following the 2008 financial meltdown in global markets. The banking regulatory framework has since been slackened in the aftermath. U.S. banks are regulated on a national or state level. The bank is subject to regulation in both groups based on its structure. State banks are overseen by the state’s department of banks or department of financial institutions. This department is typically in charge of regulating topics like permitted practices, the number of interest banks can offer, and checking and auditing banks.

National banks are controlled by the Comptroller of the Currency (OCC). OCC regulations mainly concern banks’ capital level, asset quality, and liquidity. In addition, banks that have FDIC insurance are also governed under the FDIC.

The Dodd-Frank Wall Street Reform and Consumer Protection Act was approved in the 2010 election to reduce the risk in the U.S. financial system following the financial crisis. The law requires that significant banks rate whether they have enough capital to operate in challenging economic conditions. The annual evaluation is known as a stress test.

Bank account types and loans

Here’s a summary of loans and joint accounts you can get at banks:

  • A checking account is a savings account used for daily spending and is connected to debit cards. With a checking account, you can use your debit card to make purchases, pay for bills and transfer funds, withdraw cash from ATMs or branches, etc. (Learn the basics of checking accounts. )
  • “save” refers to an interest-earning savings account designed to store short-term goals. The types of savings accounts are regular savings accounts, savings certificates, certificates of deposit, and cash market accounts. (Learn the basics of a savings account. )
  • The certificate of deposit (CD) is a savings account with an annual fixed interest rate. It requires keeping your funds in your account over a set period. They generally pay more than standard savings accounts. (Learn more about CDs. )
  • A money market account is a savings account with checking-account-like features, such as checks or debit cards. (Read more about the features of money market accounts. )
  • A tax-deductible brokerage account can be described as an investment instrument that can hold bonds, stocks, and other investments. It’s not a banking account, but a few central banks have branches licensed as brokerage firms and can offer the accounts. (Learn the basics about broker accounts. )
  • Credit cards are credit card that allows you to get money from the bank and then pay it back in the future. (Learn the basics about credit cards. )
  • The term mortgage refers to money you can borrow to purchase a home. (Learn how to get a mortgage. )
  • A car loan is the money you borrow to purchase the car you want to buy. (Learn how to apply for an auto loan. )
  • You can borrow personal loans to cover various purposes like medical bills, debt consolidation, or other expenses. (Learn how to get the top personal loans. )
  • A small-business loan can be a loan you take out to cover your business’s expenses. (Learn more about loans for small businesses. )

If you own a business or are a freelancer, you may require accounts tailored to your needs. Banks may offer the following statements for small businesses:

  • The business check account can be described as a type of spending account designed for companies that include options like invoicing, bill pay transfers, and many other features. (Learn more about corporate bank accounts. )
  • Business savings accounts are savings account for businesses. (Learn the basics about savings for business accounts. )
  • Merchant accounts are bank account that accepts electronic payment from customers. (Learn the basics about a merchant account. )

Services and features offered by banks

A bank can provide account holders with financial services and independent services available through its website, its mobile application, or in person at branches.

Services and features that are commonplace may include:

  • The debit card can be described as a card that withdraws funds from the checking account balance and allows you to purchase online or in-person and a method to withdraw cash from ATMs or branch locations. (Learn more about debit cards. )
  • Direct deposit is a way to receive paychecks or benefits payments into the account you prefer without manually depositing a check. (Learn more about direct deposit. )
  • The online bill payment service is an online service that allows you to manage and make payments to various companies that you utilize, all via your bank, not the individual retailer or service provider. (Learn more about bill pay online. )
  • The term “money transfer” refers to the type of service that allows the transfer of the funds of two different accounts. Three kinds of money transfers are Automated Clearing House transfers, wire transfers, and peer-to-peer transfers made using apps like Zelle. Money transfer services are available at banks and other institutions, including the post office or Western Union. Some banks don’t offer international transfer services.
  • Credit scores are free to access. is it a feature offered at numerous banks, including those with the biggest creditors of credit cards? (Learn the basics about credit scores. )
  • Customer support provides a support service that you can seek assistance via live chat, phone, or online chat on the bank’s site or through social media platforms like Twitter or Facebook.
  • A bank branch is a physical establishment where you can perform transactions or seek the assistance of a bank teller. (Learn how to reap the advantages of brick-and-mortar banks. )
  • An ATM, also known as an automated machine for a teller, is a machine that allows taking cash out, depositing checks or money, viewing the balance of your account, or transferring funds between accounts. A few ATMs offer the same features, and some third-party network providers, like Allpoint, are free of charge. (Learn how to avoid ATM charges. )

Other services include:

  • Checks are a type of payment slip, which is usually inside an account book and pulls funds from your account. Certain kinds of checks, including cashier’s checks or certified checks, come with additional security features, such as requiring the bank to confirm the writer’s identity and ensuring that they have sufficient funds to cover the amount of the check-in advance. (Learn details about personal checks. )
  • Check to cash allows you to either cash a cheque in the bank’s branch or deposit it using its app (often called a mobile checking service). This is usually only available to bank customers currently in the banking system. Other institutions may also provide this service, however, usually at a cost. (Learn how to cash checks. )
  • Money orders are a kind of payment slip similar to a personal check. However, it is available at banks and other institutions, such as the post office and specific retailers. (Learn the basics of money order. )
  • Overdraft programs allow banks to cover transactions greater than your balance in your checking account instead of refusing them, typically with a cost. Various programs deal with different types of transactions: Standard overdraft coverage permits the bank to advance the funds to cover trade and then transfer your account to a negative balance. Overdraft protection transfers allow you to link another account, such as an account for savings, to pay for the transaction. An overdraft line of credit is an overdraft line of credit that you can take out to cover the amount of an overdraft. (Learn more about the fees associated with overdrafts. )
  • Safe deposit boxes are essentially tiny vaults in a bank branch that you can use to store valuable items like jewelry or even wills. (Learn more about safe deposit boxes. )
  • Merchant services encompass the full range of banking requirements, such as debit and credit card processing.
  • Depositing or obtaining the roll of coins is possible at any bank branch. However, it could be limited to customers currently in the bank. It is possible to get quarters when you are using a coin-operated laundry.
  • The redemption of a savings bond is feasible at any bank branch to redeem a paper bond. Savings bonds are investments with low risk, which allow you to lend funds to authorities of the U.S. government in exchange for earning interest on the money. They are available in two forms, either paper or electronic. (Learn the basics of savings bonds. )

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Banks vs other financial companies

There are many places to manage your finances and your financial affairs. Some financial companies compete directly with banks with similar accounts; however, some provide services that banks typically don’t offer, like preparing tax returns or insurance.

Here’s a listing of companies and financial institutions that can be competitive with banks for your company:

  • Credit unions are not-for-profit organizations that provide accounts and services similar to banks. They offer higher interest rates on savings accounts and lower interest rates on loans than banks. The National Credit Union Administration governs them, which, along with the FDIC, can ensure funds with a maximum of $250,000. (Learn how credit unions work. )
  • Neobanks are companies in financial technology that usually partner with banks to provide mobile-oriented accounts that come with many more benefits over traditional bank accounts, like cash-back rewards for debit cards or budgeting tools that integrate. Neobanks may offer options to borrow money or invest it. Some are banks in themselves. (Learn more about neobanks. )
  • The digital wallet provider is businesses that have online payment accounts. Digital wallets save the information and allow payment between contacts (peer-to-peer transactions) and customer-based payment to companies. The digital wallets are PayPal, Venmo, Cash App, Google Pay, Apple Pay, and Samsung Pay.
  • Online lenders are online-based banks or nonbank firms authorized to provide loans. (Learn more about loans online. )

Here’s a list of who can provide valuable services to meet your financial requirements. Certain compete with banks, and others can assist customers in ways that banks might not be able to:

  • Online brokers act as intermediaries that connect you with a finance firm in various areas, such as trading or investing mortgages, insurance, or even insurance. (Learn more about brokers online for investing. )
  • Insurance companies, also called insurers, have been authorized to offer financial protection in a catastrophe, death, or unexpected incident. Insurance types include life, auto, health disability, renters, and homeowners insurance.
  • Investment brokers are registered agents or companies (known as brokerage companies) that buy or hold securities, including bonds and stocks, on your behalf. Some banks have a brokerage department. (Learn more about the investment brokers. )
  • They are licensed agents that serve as intermediaries between mortgage lenders and you, including banks. (Learn more you can learn about mortgage brokers. )
  • They are agents licensed by the state that act as intermediaries between you and an insurance company. (Learn more information about the insurance broker. )
  • These businesses collect information about your credit use and make credit reports available to you, the lenders you work with, and other individuals. (Learn how to use the credit bureaus. )
  • Bank and check screening firms are companies that collect information about your history of writing checks and any other misuse of your savings or checking accounts, like fraudulent transactions or the possibility of letting charges remain unpaid. (Learn More about the ChexSystems and how various financial institutions and credit unions use them to perform screening. )
  • The federal student loan servicers serve as agents between your federal government and you, who provided you with a loan to pay to go to college. (Learn more information about the student loan servicers. )
  • Tax preparers are typically credentialed professionals who assist you with filing the tax return, particularly when they’re complex. (Learn the basics of tax preparation. )
  • Financial advisors are experts with different certifications who provide financial planning in the long and short term. This term may refer to Robo-advisors, which are digital, low-cost investment services that offer the virtual assistance of human, financial advisors. (Learn more about how to find an advisor for financial matters. )
  • The companies that trade in cryptocurrencies are firms or online brokers who let customers buy, hold, and sell cryptocurrency. (Learn more details about the most reliable cryptocurrency exchanges. )
  • The money service industry is an array of businesses that aren’t banks. They include money exchange, check cashers and the U.S. Postal Service, and money transfer businesses like Western Union and MoneyGram.

Frequently asked questions

How many banks exist in USA?

As per the FDIC, there were over 4,900 FDIC-insured institutions as of March 2021.

What can a bank do?

A bank offers customers accounts where they can hold or spend money and provides loans to both businesses and individuals.

How do I get a bank account?

“Banking” or “banking” refers to banks’ traditional banking activities, like taking customers’ deposits and lending funds. Nonbank entities, such as neobanks may engage in banking services using a partner bank.

Are all Neobanks, banks?

Many new banks do not qualify as legally recognized banks. They are not associated with the Federal Deposit Insurance Corporation. This federal government agency provides FDIC assurance to banks as much as $250,000 for each depositor. In reality, many new banks work with banks so that insurance for banks is extended to a neobank’s checking or savings accounts and the equivalents in the practical sense.

How Can I Tell My money is Secured in the bank?

The Federal Deposit Insurance Corporation (FDIC) is an independent government agency established by Congress to ensure the stability and confidence of the public within the U.S. financial system. The FDIC guarantees deposits and monitors and evaluates banks to ensure security and protection for consumers. The maximum insurance coverage is $250,000 for each depositor, insured bank, and account ownership category. There is no requirement to buy this insurance. If you deposit at an FDIC-insured institution, then you’re automatically covered. This site will help you locate FDIC-insured institutions and branches.

Are Any Non-Bank Accounts Insured?

The Securities Investor Protection Corporation’s (SIPC) goal is to recover money and securities if the member brokerage firm fails. SIPC is a non-profit organization founded by Congress established in the year 1970. SIPC is protection for clients of all brokerage companies within the U.S. This applies to stocks and bonds (securities) and the brokerage firm’s cash. Firms that brokers do not fail or shut down suddenly; however, if it happens, the SIPC helps to close the business by liquidation and creates claims procedures that will protect the client. SIPC ensures your account is covered for as much as $500,000 in insecurities. This includes a maximum of $250,000 in cash on your account. This link will display an overview of all the members who are registered SIPC members.

Should I choose the Retail Bank, Credit Union, or Commercial Bank?

It is essential to consider whether you would like to keep both personal and business accounts in the same account at the same institution or if you prefer to keep separate accounts at banks. The retail banking institution is the best choice for banking daily with essential banking services for customers. You can select the traditional bank with a physical location or an online bank when you don’t wish or require a physical visit to bank branches. Consider a credit union, a non-profit institution that can serve those who have an employer, labor union, or other professional interests.

What other factors go into Choosing a Bank?

The size of the bank is another factor to consider. The largest retail banks are usually known and well-known. They also have branches throughout the U.S., ideal if you frequently travel to work or on vacation. You’ll have access to your cash during your absence and be able to save ATM charges for foreign ATMs.

The final thoughts

There are numerous types of banks with different quality of services and products that will meet nearly any need in banking. A little analysis and comparison will help you choose the best bank to protect your funds, create credit, pay and borrow money, and save to meet future requirements like retirement, emergency buying a home, etc.

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