A piggy bank might work when you’re a kid, but as you begin to earn and save money, you need a more functional place for your cash.
Banks are financial institutions that hold and insure your deposits, protecting them from theft, loss, or natural disaster. They can also loan you money when you need to make a major purchase, such as a house or car.
With thousands of banks catering to different audiences and financial goals, the definition and purpose of a bank may start to get blurry. Read on to learn more about how banks work and the products and services they offer.
A bank is a type of licensed financial institution that accepts deposits and provides loans to its customers. Banks commonly offer checking accounts, savings accounts, mortgages, auto loans, and more — but offerings can vary widely by bank.
Banks are privately owned or publicly traded for-profit entities. They can serve individuals, governments, or businesses — including other banks — but they must have a charter (either at the federal or state level) to operate. To get a charter from the federal or state government, banks must show they’re likely to have a “reasonable chance for success” and “operate in a safe and sound manner.”
Banks accept deposits from customers, who put their money in checking accounts, savings accounts, or other deposit accounts. Banks then pool this money to make loans to their customers. They also process payments, provide credit, and pay interest on customers’ deposits.
When you put money into a federally insured bank, you receive insurance from the Federal Deposit Insurance Corporation (FDIC). The FDIC protects deposits of up to $250,000 per depositor, per institution, per account category in the case of bank failure.
Read more: List of failed banks: How many banks failed in the past 10 years?
Because banks are businesses, they need to be profitable. Banks earn money by charging interest on loans, collecting various types of fees (account maintenance fees, overdraft fees, ATM fees, and more), and from their own investments.
Banks offer a range of different products and services depending on their size and customer base. Below are some of the common accounts, services, and features banks may offer:
There are many types of banks, each serving a different audience or offering unique features. Here’s a breakdown of a few common types:
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Central bank: Central banks serve a country, not individual customers. Their role is in managing national economies through monetary policy — by adjusting interest rates, managing inflation, and maximizing employment. The Federal Reserve is the central bank in the United States.
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Commercial bank: The term “commercial bank” encapsulates several specific bank types. By definition, commercial banks are financial institutions that accept deposits and provide loans. JP Morgan Chase and Wells Fargo are examples of U.S. commercial banks.
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National bank: National banks are a type of commercial bank. They’re chartered and regulated by the Office of the Comptroller of the Currency rather than at the state level.
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Regional bank: Regional banks are another type of commercial bank. They’re defined as having between $10 billion and $100 billion in total assets, and often serve a particular region of the country.
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Community bank: Community banks are also commercial banks, but they’re smaller than national and regional banks, having assets totaling less than $10 billion. They serve a specific town or area, often with services catered to the people who live there. While community banks might offer fewer services compared to national or regional banks, they tend to excel in customer service.
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Online bank: Online banks offer many of the same products and services as traditional commercial banks, but they don’t maintain physical locations. Instead, all banking happens through a bank’s website or mobile app. Due to lower overhead costs, online banks generally offer fewer fees and higher savings interest rates.
Read more: These are the 20 biggest banks in the US
Like banks, credit unions offer deposit accounts, loans, and other financial products and services to consumers. But there are several major differences between banks and credit unions in terms of how these two types of institutions operate:
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Business structure: While banks are for-profit businesses, credit unions are not-for-profit financial institutions.
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Ownership: Banks are privately owned or publicly traded. Meanwhile, credit unions are member-owned and controlled.
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Insurance coverage: Both banks and credit unions offer deposit insurance up to federal limits, but the coverage is provided by different entities. The FDIC insures banks, while the National Credit Union Administration (NCUA) insures credit unions.
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Membership requirements: Banks don’t require membership, but credit unions do. To join a credit union, you have to meet certain eligibility requirements, such as living in a particular area, working in a certain industry, or making a donation to a specific cause.
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Fees and costs: Because credit unions are not-for-profit entities, they’re generally able to pass on profits to their members. This could look like higher savings interest rates, fewer account fees, and lower loan costs. Banks, meanwhile, tend to charge higher fees and offer lower interest on savings.
Read more: Credit union vs. bank: Which is right for you?
With more than 4,000 banks in the U.S., choosing the right bank can be overwhelming. But there’s no such thing as a perfect bank — you just need to pick one that offers what you need.
If you’re struggling to pick a bank, these considerations can help:
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Offerings: Make sure a bank offers the accounts and services you need. For example, if you want to open a checking account and a high-yield savings account at the same institution, confirm that the bank offers both.
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Fees: Fees can eat into your account balance, and you should avoid them if possible. Look for banks that offer no fees or allow you to get fees waived when you meet certain requirements.
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Interest rates: If you’re opening a savings account, look for banks that offer competitive yields. On the other hand, if you’re shopping for a loan, the lower the interest rate, the better.
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Access: Some people like to visit a branch while others prefer banking online. If you fall into the former category, make sure you choose a bank with accessible locations. If mobile banking is your thing, choose a bank with a highly rated and user-friendly mobile app.
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Customer service and reputation: Customer service goes a long way in making or breaking your banking experience. Check third-party review sites, such as the Better Business Bureau or Trustpilot, to get a sense of what a bank offers. You can also look up a bank on the Consumer Financial Protection Bureau’s complaint database for insight into customer complaints.
