Finance / Money

What is a Bank? Bank Definition and Types

by Ratul Sinha

What is a Bank?

A bank is one of the most famous yet not quite clearly understood organizations. People don’t take the time to understand the meaning of banks which is quite important before jumping into the classification of banks. A certified institution that receives deposits provides loans to people and provides other financial services like currency exchange and financial advising is called a bank.

What is a Bank? Bank Definition and Types

In the modern world, different kinds of banks provide various services. Different banks allow its customers to have various services which differ banks from one another.

Type 01: Retail Banks – The Bank for Mass People

Retail banks are more familiar to people since they provide their services locally. These types of banks provide basic banking services to their customers and local banks are connected to larger banks that usually provide commercial services to the consumer. Retail banks can act as financial advisors sometimes which enables them to provide personal loans; function to allow borrowing and lending. These loans are as mentioned earlier small in size, unlike commercial banks who provide large loans to business and corporations. Retail banks can also keep mortgages and provide financial services to local consumers.

Type 02: Commercial Banks – The Business Banking

Commercial banks are more or less like retail banks. It serves individuals and small businesses. They provide loans, financial advice, and consumers can open savings accounts and deposit their money. These kinds of banks earn their monetary profit by charging consumers for the loan they have been provided. These loans may vary from mortgage and personal loans to business loans. Federal Deposit Insurance Corporation (FDIC) insures all the deposits of commercial banks which leads to deposits being more lucrative to the consumers. Commercial banks

Type 03: Central Banks – Important for Monetary Policy and Banking System

Central banks are a special kind of bank. They serve the government plays an important role in the monetary policies of a country. The central bank controls all the other banks of the nation, which is why it has a different approach in the banking sector. Central bank helps the government to reach its goal with its actions on the field. Central banks influence the economic state of a country with its actions and ensure economic stability. The central bank is responsible for every rule and regulation that has been structured for the banks within the country.

Type 04: Mutual or Cooperative Banks

Mutual banks are one of the most unique ones in the banking sector. Mutual banks serve the same financial product that commercial and retail banks provide. But what makes mutual or cooperative banks different from others is that the customers who are affiliated with the bank, get a portion of the bank’s ownership. For that cooperative banks have to answer to both the government and the customers, for every step they take. Mutual banks are also publicly traded.

Type 04: Investment Banks – Helps to Channel Investment Funds

The main focus of investment banks while serving is financial advising. Investment banks serve large corporations and organizations as financial advisers and intermediaries. Investment banks help organizations with the capital collection process, facilitate them by providing securities straight to the public, and help with huge mergers. Investment banks help organizations to achieve the goal by facilitating them with solutions to complex tasks that are related to the financial state. The main source of income in this type of bank is the fees they charge for the services that are being provided.

Type 05: Private Banks

Private banks in general provide all the services that any other bank would provide. But this type of bank only serves to a specified audience. Usually, these organizations are owned by a group of wealthy people. Their audience or consumer to be exact, are the people who earn more in society or are related to wealthy people by blood or marriage. Privates bank is lucrative to wealthy people because taking loans and getting financial advice from the people who understand your situation is convenient for businesses in general.

Type 06: Online Bank – Internet Banking System Allows You to Transfer Fund in Seconds 

With digitization and the global market is the biggest one out there, online services have reached more audience than it ever could. For that new banking system is adapting to that too. Some banks provide the same services that old school banks do but the service remains online. Since the business is being conducted on the internet, the service charges are cheap and the authorities are being able to minimize their cost. Online banking is the new future and that is why many banks are trying to provide online services too.

Type 07: Credit Unions

Credit unions are more or less like mutual banks. But credit unions do not have to answer to all of the shareholders. Instead, credit unions have to answer to their members only.  Even though they act a bit differently, they still have to conduct their actions within government rules and regulations. Higher interest and the lower interest rate on loans can be managed by credit unions customers because they’re both the consumer and owner. For the credit union’s personalized services, this type of bank ban only is seen in local areas. Not having a wide range of coverage, it cannot provide all the services that other banks can provide.

Type 08: Savings and Loan Associations

Financial institutions that focus on savings facilities and provide loans are known as savings and loan associations. They conduct their business by helping the consumers buy a house or mortgage. It was first introduced so that people are encouraged to buy a home but it did not expand their business and the focus remained on this specific area. Unlike other banks, they are well known among local areas. Even though this type of bank does not have much coverage, they certainly are well known among consumers.

Bottom Line

Different types of banks serve for different purposes but all of them combined is the whole banking system. If one falls short of their responsibility then others have to suffer too and for that sole reason, banks in a country or a certain area have good bonding between them. Banks make sure that the economic well-being of the country is being assured and organization growth is being conducted.

Related

Resources

  • https://www.google.com/amp/s/www.thestreet.com/.amp/personal-finance/education/types-of-banks-14934713
  • https://www.investopedia.com/terms/c/commercialbank.asp