There are a number of services provided by banks in the modern economy. Different types of banks provide services to different types of people and organizations, but generally banks are involved in securely holding money, processing financial transactions and issuing loans. Investment banks are also involved in helping companies raise money through stock offerings.
Different types of banks provide different types of financial services, but generally banks are involved in processing financial transactions, lending money and helping people and institutions store and save.
Understanding Retail Banking
Retail banking, also called consumer banking, is the sector of the banking industry that works with individual consumers and often small businesses. Retail banks typically offer checking and savings accounts to consumers, as well as other types of accounts, such as money market accounts and certificates of deposit. Money market accounts usually offer higher interest rates by investing in short-term loans to companies and government agencies, while certificates of deposit let customers lock in higher rates by agreeing to keep money in the account for a minimum amount of time.
Retail banks then use the money they receive in deposits to make loans. Those include personal loans, loans through credit card accounts, mortgages on real estate and auto loans. Different banks might specialize in or emphasize particular types of loans.
Credit unions, which are nonprofit organizations often owned by their members, offer similar services to banks, including both deposit accounts and loans.
Bank and Credit Union Insurance
Bank accounts with U.S. banks are typically insured by the Federal Deposit Insurance Corporation for up to $250,000 per customer per bank. Similarly, credit union accounts are insured by the National Credit Union Administration up to the same amount. Some products offered through banks, such as investment accounts, aren't covered by FDIC insurance. Banks will usually make clear what types of products and services are backed by the FDIC and which are not.
Banks and Transactions
Banks also play an important role in facilitating financial transactions. Whether you're sending money with a digital app, making a payment with a credit card, cashing a check or getting a direct deposit of your paycheck, most modern financial transactions involve at least one bank. Banks work with each other with payment networks, like Mastercard and Visa, and with central banks like the Federal Reserve to move money efficiently.
Banking networks often make the details of how money moves when you use your credit card or write a check transparent to consumers. However, you may indirectly pay more to merchants because of the fees they pay to accept credit cards and other digital payments. In some cases, you may be better off using a particular network, like an in-network ATM or a particular money transfer app, because it has a deal with your bank that will let you receive services cheaper or faster.
Specialized Type of Bank
Not all banks work directly with everyday consumers. Institutions known as merchant banks work with international corporations and those involved in importing and exporting to facilitate trade. Investment banks work with big companies looking to sell shares and bonds on private or public markets, such as through initial public offerings. Certain banks and divisions of banks focus on the needs of other particular industries, from real estate to transportation.
Some so-called private banks offer premium services to high-net-worth consumers and families, usually offering more individualized guidance on investment opportunities.
Some large financial institutions offer multiple types of services, including consumer banking, consumer stock brokerage services and merchant or investment banking. They may also have private banking divisions catering to wealthier customers.
- The American Banker: What's Hot and What's Not in Retail Banking
- NerdWallet: Credit Unions vs. Banks: How to Decide
- Investopedia: Certificate of Deposit
- Investopedia: Retail Banking
- Investopedia: Money Market Account
- FDIC: Deposit Insurance FAQs
- Investopedia: Private Banking
- Investopedia: Merchant Bank
- Federal Reserve: Automated Clearinghouse Services