Financial services in today’s marketplace, a financial institution exists to provide a wide range of lending, deposit, and investment products to individuals, businesses, or both.
While some financial institutions only focus is to provide services and accounts for the general public, others are more likely to serve only certain types of consumers with more specialized offerings.
The major categories of financial institutions include central banks, retail and commercial banks, internet banks, credit unions, savings, and loans associations, investment banks, investment companies, brokerage firms, insurance companies, and mortgage companies.
To know which financial institution is most appropriate for serving a specific need, it is crucial to understand the difference between the types of institutions and what their major purpose of service is
9 Major Types of Financial Institutions.
1. Central Banks
Central banks are the financial institutions that are responsible for the oversight and management of all other banks.
In the United States, the central bank is the Federal Reserve Bank, which responsibility includes conducting monetary policy, supervision
Individual consumers do not contact a central bank; instead, large financial institutions work directly with the Federal Reserve Bank to provide financial products and services to the general public.
Central banks are the financial institution that is given privileged power over the production and distribution of money and credit for an individual country or a group of nations.
In today’s economies, the central bank is mostly responsible for the formulation of monetary policy and the regulation of other types of banks.
Central banks are innately non-market-based or even anti-competitive institutions.
Although some of the central banks are nationalized, many central banks are not government agencies, and so are often acknowledged as being politically independent.
However, even if a central bank is not legally owned by the government, its responsibilities are established and guided by law.
The Integral feature of a central bank that differentiates it from other banks—is its legal monopoly status, which gives it the privilege to issue banknotes and cash.
2. Retail and Commercial Banks
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 individual consumers and businesses.
The level of personalized retail banking services that is been provided to a client relies on their level of income and the extent of their relationship with the bank.
While a teller or customer service representative would commonly serve a client of modest means, an account manager or private banker would manage the banking demand of a high-net-worth individual (HNWI) who has a past relationship with the bank.
Although brick-and-mortar branches are still imperative to conduct the sense of solidity and stability that is important to banking, retail banking is perhaps one scope of banking that has been most impacted by technology such as automated teller machines (ATMs) and the popularity of online and telephone banking.
Products offered at retail and commercial banks include:
- Checking accounts
- Savings accounts
- Certificates of deposit (CDs)
- Personal loans
- Mortgage loans
- Credit cards
- Business banking accounts.
- Automobile financing
- Lines of credit such as home equity lines of credit (HELOCs) and other personal credit products
- Foreign currency and remittance services
Retail banking clients may also be offered the following services, generally through another division or affiliate of the bank:
- Stock brokerage (discount and full-service)
- Insurance
- Wealth management
- Private banking
3. Internet Banks
In the financial institution market, a newer entrant of banking is the internet banks, which work in a similar way to retail banks.
Internet banks offer the same products and services as conventional banks, but they do so through online platforms using your mobile phone or computer instead of brick-and-mortar locations.
Internet Banking, also known as net banking or online banking, is an electronic payment system that allows the customer of a bank or a financial institution to perform financial or non-financial transactions online via the internet.
Internet banking gives online access to almost every banking service, traditionally available through a local branch including fund transfers, deposits, and online bill payments to the customers.
Internet banking can be accessed by anyone who has registered for online banking at the bank or financial institution, has an active bank account.
After registering for online banking facilities, a customer need not visit the bank every time he/she wants to make use of banking services. It is not just convenient but also a secure method of banking. Net banking portals are secured by unique User/Customer IDs and passwords.
Under internet banks, there are two categories of banks which are: digital banks and neo-banks.
Digital banks are online-only platforms but they are affiliated with traditional banks.
However, neobanks are pure digital native banks with no affiliation to any bank but themselves.
4. Credit Unions
Credit unions serve a specific demographic depending on their field of membership, such as teachers or members of the military.
While the products offered by the credit union resemble retail bank offerings.
Also, Credit unions are owned by their members and operate for the benefit of the members.
A credit union is a type of financial institution akin to a commercial bank, is a member-owned financial cooperative, which is controlled by its members and operated on a not-for-profit basis.
Credit unions generally provide services to members that are of the same affinity to retail banks, including deposit accounts, provision of credit, and other financial services.
In most African countries, credit unions are commonly referred to as SACCOs (Savings and Credit Co-operative Societies).
5. Savings and Loan Associations
Financial institutions that are held mutually and also provide not more than 20% of total lending to businesses fall under the category of savings and loan associations.
A savings and loan association — also known as an S&L, a thrift, or simply a savings and loan — is a financial institution that has the same similarity with the bank that specializes in helping people get residential mortgages.
Savings and loan associations can be owned either by their customers or by shareholders, but what they primarily mean is to let the average person pool his money so that members could purchase homes.
Individual consumers use savings and loan associations for
- Deposit accounts
- Personal loans
- Mortgage lending.
6. Investment Banks and Companies
Investment banks are like other types of banks that accept deposits; instead, they help individuals, businesses, and governments to raise capital through the issuance of securities.
Investment companies, which are traditionally known as mutual fund companies, pool funds from individuals and institutional investors to give them access to the broader securities market.
An investment bank acts as a mediator between the company and the investors on the exchange of stock.
It creates a feasible investment plan for businesses that involves appropriate pricing of financial instruments
When the company holds an initial public offer (IPO), an investment bank will directly buy a good amount of the shares.
Although, it sells these shares on the market, acting as a proxy to the company. Thereby, it helps to maximize the company’s revenue and make sure that all applicable regulatory policies are observed.
In return, its profits by marking up on the initial price of shares while selling it to investors whether individual or institutional.
On the other hand, if the stock becomes overpriced, it may also lose money as it eventually sells at a lower price than it paid.
A company should consider carefully its need to approach an investment banker to grow and expand its business.
The size of capital being raised and the market competition are the main factors to put into consideration before turning to the aid of an investment banker.
Also, new ventures must be well researched before progressing, and hence, the investment banker has the necessary skill in this.
Accordingly, the following are the benefits of taking the help of an investment bank:
- Effective client handling and handholding about investing their money in other companies to increase their value.
- An assured raising of financial capital by underwriting or by acting as an agent in the issuance of securities to arrange for acquisition, merger or sale.
- Thorough investigation and due diligence to ensure that its client’s deal meets every compliance to minimise any failure risk or loss of invested capital.
Robo-advisors are the new breed of such companies.
Robo-advisor is enabled by mobile technology to support investment services more cost-effectively and also provide broader access to investing by the public.
7. Brokerage Firms
Brokerage firms help individuals and institutional investors 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.
A brokerage firm is a business that serves as a transactional intermediary between a buyer and a seller of financial products.
A brokerage firm trades stocks, bonds, options, and other financial products on behalf of clients.
Many brokerages employ individual brokers as a way to get resources and offer the best service.
The firm makes its income from a commission collected for every finished deal. It can also function as a professional adviser for people who engage in trading securities.
Full-service brokerages offer more than just the basics.
Apart from the fact that they execute trades for you, they also provide a range of other services, which might include tax planning, research, investment advice, and estate and retirement planning.
A full-service brokerage will particularly have a dedicated broker who can meet with you in person and provide personalized advice based on your specific situation.
In addition, many financial services companies also have brokerage houses as part of their broader services.
Finding a good brokerage firm can be an important piece of any successful financial plan.
8. Insurance Companies
Insurance companies are financial institutions that help individuals transfer the risk of loss.
Individuals and businesses use insurance companies to protect against financial loss due to death, disability, accidents, property damage, and other misfortunes.
Insurance is a contract, represented by a policy, in which an individual or entity receives financial protection or remuneration against losses and/or damages from an insurance company.
9. Mortgage Companies
Mortgage companies are financial institutions that originate or fund mortgage loans.
While most mortgage companies serve the individual consumer market, some specialize in lending options for commercial real estate only.
A mortgage company is a dedicated financial firm engaged in the business of originating and/or funding mortgages for residential or commercial property.
A mortgage company is often just the initiator of a loan; it markets itself to potential borrowers and tries to raise capital from one of several client financial institutions that provide the capital for the mortgage itself.
A mortgage company is a financial firm that underwrites and issues (originates) its mortgages to people that buys a home, using their capital to issue the loans.
Also known as a direct lender, a mortgage company particularly only focuses on mortgage products and does not offer other banking services such as checking, investments, or loans for other purposes.
Furthermore, they will usually offer their products and will not offer loans or products from other companies.
Many mortgage companies nowadays operate online or have sparse branch locations, which may decrease face-to-face interaction, but could, at the same time, reduce the costs of doing business.
1 thought on “9 Major Types of Financial Institutions”