Different Types of Financial Institutions

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In today’s financial services marketplace, a financial institution exists to provide a wide variety of deposit, lending, and investment products to individuals, businesses, or both. While some financial institutions focus on providing services and accounts for the general public, others are more likely to serve only certain consumers with more specialized offerings.

The types of financial institutions range from banks and credit unions to investment banks and brokerage firms, to mortgage lenders. To know which financial institution is most appropriate for serving a specific need, learn about the different types of institutions and their purposes.

Key Takeaways

• Eight major types of financial institutions provide various services from mortgage loans to investment vehicles.
• Financial institutions help regulate the economy, ensure fair financial practices, and facilitate prosperity.
• The major categories of financial institutions are central banks, retail and commercial banks, internet banks, credit unions, savings and loan (S&L) associations, investment banks and companies, brokerage firms, insurance companies, and mortgage companies.
  

Within a capitalistic economic system, financial institutions help regulate the economy, ensure fair financial practices, and facilitate prosperity. There is no hard and fast list of types of financial institutions. Title 31 of the U.S. Code lists 31 types, while industry sources list a lot fewer. But for most consumers and investors, these are the most important financial institutions to know about.

1. Central Banks

Central banks are the financial institutions responsible for overseeing and managing all other banks. In the United States, the central bank is the Federal Reserve Bank (Fed), which is responsible for conducting monetary policy and supervising and regulating financial institutions.

Individual consumers do not have direct contact with a central bank. Instead, large financial institutions work directly with the Fed 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. Today, most large banks offer deposit accounts, loans, and limited financial advice to both consumers and businesses.

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.

Internet banks offer the same products and services as conventional banks, but they do so through online platforms instead of brick-and-mortar locations. Internet banks may allow consumers to carry out banking services via computer, mobile device, Automated Teller Machine (ATM), or by calling a customer service line. Using your phone and the bank's app, you can deposit checks into your account by taking a picture of your check.

3. Credit Unions

A credit union is a type of nonprofit financial institution providing traditional banking services and is created, owned, and operated by its members.

Historically, credit unions used to serve a specific and shared demographic group, also known as the field of membership. The commonality might be based on employer, a geographic area, or membership in another type of group. Today, many have loosened membership restrictions and are open to the general public with minimal requirements, such as joining a nonprofit organization for a small fee.

Credit unions are not publicly traded and only need to make enough money to continue daily operations, so they often can afford to provide reduced fees and better interest rates than banks.

4. Savings and Loan (S&L) Associations

Savings and loan associations provide individual consumers with checking accounts, personal loans, and home mortgages. Financial institutions are owned by their customers or community. A savings and loan is a type of thrift that is required by law to produce a certain number of loans secured by residential real estate, but the aim of most savings and loans is to lend for residential mortgages.

5. Investment Banks

Investment banks 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 when one company is merging with another. They can also act as a broker or financial advisor for large institutional clients such as pension funds.

Investment banks help individuals, businesses, and governments raise capital through the issuance of securities.

6. Brokerage Firms

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.

7. 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. These companies can also include the self-insurance programs of other financial institutions such, as a savings and loan holding company. Some insurance will partner with banks to sell insurance products to the customer pool.

8. Mortgage Companies

Financial institutions that specialize in originating or funding mortgage loans are mortgage companies. While most mortgage companies serve the individual consumer market, some specialize in lending options for commercial real estate only.

Mortgage companies focus exclusively on originating loans and seek funding from financial institutions that provide the capital for the mortgages.

Many mortgage companies today operate online or have limited branch locations, which allows for lower mortgage costs and fees.

Investopedia / Michela Buttignol

What Is a Financial Intermediary?

A financial intermediary is an entity that acts as the middleman between two parties, generally banks or funds, in a financial transaction. A financial intermediary may lower the cost of doing business.

How Do Banks Make Money?

Banks make money by charging a variety of fees and by earning interest from loans such as mortgages, auto loans, business loans, and personal loans. The bank pays depositors interest for using money to make those loans. The bank's profit comes from difference between what the bank earns on fees and interest and what it pays depositors.

Are All Financial Institutions Safe?

Yes, barring an economic catastrophe. Banks and credit unions are generally safe places to keep your money, because they are insured by the federal government via two agencies: the Federal Deposit Insurance Corp. (FDIC) and the National Credit Union Administration (NCUA). This insurance covers your principal and any interest you’re owed through the date of your bank’s default, up to $250,000 in combined total balances.

Are Cryptocurrency Exchanges Considered Financial Institutions?

It’s complicated. Despite a large number of cryptocurrency investors and blockchain firms in the United States, the country hasn’t yet developed a clear regulatory framework for the asset class. The Securities and Exchange Commission (SEC) typically views cryptocurrency as a security, while the Commodity Futures Trading Commission (CFTC) calls Bitcoin a commodity, and the Treasury calls it a currency.

Crypto exchanges in the United States fall under the regulatory scope of the Bank Secrecy Act (BSA) and must register with the Financial Crimes Enforcement Network (FinCEN). They are also required to comply with anti-money laundering (AML) and combating the financing of terrorism (CFT) obligations.

The Bottom Line

There are eight major types of financial institutions that provide a variety of services from mortgage loans to investment vehicles. Financial institutions are vital for regulating the economy, ensuring fair financial practices, and facilitating prosperity.

The major categories of financial institutions are central banks, retail and commercial banks, credit unions, savings and loan associations, investment banks and companies, brokerage firms, insurance companies, and mortgage companies.

1. Federal Reserve System. “Overview of the Federal Reserve System,” Page 1.
2. FDIC. "Banking at the Speed of Technology."
3. Mycreditunion.gov. "About Credit Unions."
4. New York State Department of Financial Services. "Institution Definitions and Descriptions."
5. National Information Center. "Institution Categories."
6. FDIC. "Investments."
7. Investor.gov. "Brokers."
8. FDIC. "How Banks Work."
9. NCUA "Share Insurance Fund Overview."
10. Federal Deposit Insurance Corp. “Are My Deposit Accounts Insured by the FDIC?”
11. Congressional Research Service. "Crypto-Asset Exchanges: Current Practices and Policy Issues."

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A sweep account automatically transfers amounts over or below a certain level into a higher interest-earning investment option.

A Negotiable Order of Withdrawal (NOW) Account is an interest-earning bank account. A customer with this type of account can write drafts against money held on deposit.

An Individual Development Account (IDA) is a savings account to help lower-income individuals build assets to achieve financial stability.

Peer-to-peer (P2P) lending enables an individual to obtain a loan directly from another individual, cutting out the traditional bank as the middleman.

A deposit interest rate is the interest rate paid to deposit account holders for accounts like certificates of deposit (CD) and savings accounts.

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