What are the 9 main types of financial institutions?

Today's financial services market includes financial institutions that offer a variety of deposits, loans, and investment products to individuals, corporations, or both. Some financial institutions focus on providing services and accounts to the general public, while others offer more specialized services to specific consumers.

To know which financial institution is best for your specific needs, it is important to understand the difference between the types of institutions and the purposes they serve.

KEY TAKEAWAYS:

• There are nine main types of financial institutions that offer services ranging from mortgages to investment vehicles.
• As finance becomes more pervasive in our lives, more accounts or products of this type are more likely to be offered.
• More and more financial institutions are moving online today, which in some cases can reduce service fees.
• The main categories of financial institutions include central banks, retail banks, commercial banks, internet banks, credit unions, savings and lenders, investment banks, securities firms, brokerage firms, insurance companies, and mortgage lenders.

1. Central Bank

A central bank is a financial institution that oversees and manages all other banks. In the United States, the central bank is the Federal Reserve Bank which is responsible for conducting monetary policy and supervision and regulation of financial institutions.

Individual consumers do not have direct contact with a central bank; instead, large financial institutions work directly with the Federal Reserve Bank to provide products and services to the general public

2. Retail and Commercial Banks

Traditionally, retail banks offered products to individual consumers while commercial banks worked directly with businesses. Currently, the majority of large banks offer deposit accounts, lending, and limited financial advice to both demographics.

Products offered at retail and commercial banks include checking and savings accounts, certificates of deposit (CDs), personal and mortgage loans, credit cards, and business banking accounts.

3. Internet bank

A newcomer to the financial institution market is Internet Banking, which works in a similar way to retail banking. Internet banks offer the same products and services as traditional banks, but through online platforms rather than offline shops. There are two categories of internet banks: digital banks and new banks. Digital Banking is an online-only platform of traditional banks. However, neo-banks are purely digital-native banks that are not affiliated with any bank other than themselves.

4. Credit Union

A credit union is a type of financial institution that provides traditional banking services and is incorporated, owned and operated by its members.

In recent times, credit unions have served a specific demographic based on area of ​​affiliation, e.g Teachers or members of the military. However, nowadays they have relaxed membership restrictions and are open to the general public.

Credit unions are not publicly traded and only need to earn enough money to continue their day-to-day operations. As a result, they can afford to offer their customers better rates than commercial banks.

Although members have easier access to rates, credit unions offer fewer services than traditional banks and fewer physical stores than most banks, which can be a disadvantage for customers who prefer face-to-face service.

5. Savings and Loan Association

Financial institutions that are jointly owned by customers and provide less than 20% of total corporate loans fall into the category of savings and credit unions. They provide individuals with checks and accounts, personal loans, and mortgages.

Unlike commercial banks, most of these institutions are community-based and privately owned, although some may also be publicly traded. The members pay dues that are pooled together, which allows better rates on banking products.

6. Investment Banks

These are financial institutions that provide services and act as an intermediary in complex transactions, for instance, when a startup is preparing for an initial public offering (IPO), or in merges. They can also act as a broker or financial adviser for large institutional clients such as pension funds.

Investment banks do not accept deposits. Instead, it helps individuals, companies, and governments raise capital by issuing securities. Investment companies, traditionally known as mutual fund companies, raise capital from individual and institutional investors, giving them access to the wider securities market.

Global investment banks include JPMorgan Chase, Goldman Sachs, Morgan Stanley, Citigroup, Bank of America, Credit Suisse, and Deutsche Bank. Robo-Advisor is a next-generation company that supports investment services more efficiently and makes investing more accessible to the public through mobile technology.

7. Brokerage Firms

Assist individuals and institutions in buying and selling securities among available investors. Customers of brokerage firms can place trades of stocks, bonds, mutual funds, exchange-traded funds(ETFs), and some alternative investments.

8. Insurance Companies

Financial institutions that help individuals transfer the risk of loss are known as insurance companies. Individuals and businesses use insurance companies to protect against financial loss due to death, disability, accidents, property damage, and other misfortunes.

9. Mortgage finance companies

Financial institutions that specialize in originating or funding mortgages are mortgage companies (https://www.investopedia.com/terms/m/mortgage-company.asp). While most mortgage companies serve the individual consumer market, some specialize in lending options for commercial real estate only.

Mortgage companies focus solely on originating loans and seek funding from financial institutions that provide mortgage capital.

Many mortgage companies today operate online or have limited branches, which helps reduce mortgage costs and fees.

What are the main differences between a bank and other financial institutions?

The biggest difference between banks and other non-bank financial institutions is that they do not accept savings deposits and cash deposits, which is the core business of banks.

What is a Financial Broker or Intermediary?

A financial intermediary is a legal entity that acts as an intermediary between two parties in a financial transaction, usually a bank or fund. A financial intermediary can reduce your business costs.

How do banks make money?

Commercial banks make money by collecting various fees and interest from loans such as mortgages, car loans, business loans, and personal loans. Customer deposits provide the capital for banks to provide these loans.