What Is a Bank?
A bank is a financial institution regulated at the federal level, state level or both. The primary role of banks is to take deposits and make loans. But banks can offer a wide range of products and services, including:
- Deposit accounts (checking accounts, savings accounts, CDs, money market accounts)
- Loans, including mortgage loans, auto loans and personal loans
- Credit cards
- Check-cashing services
- Wealth management services
- Insurance
- Business banking
Most banks in the United States are insured by the Federal Deposit Insurance Corporation (FDIC). The FDIC covers deposit accounts, up to specified limits, in the event that a bank fails. The current FDIC coverage limit is $250,000 per depositor, per account ownership type, per financial institution.
There are several types of banks (see Types of Banks below). Here we’re mainly referring to retail banks.
What Is a Financial Institution?
A financial institution is an entity that engages in transactions involving the movement of money or financial assets from one place to another. Examples of financial institutions include:
- Banks
- Credit unions
- Savings and loan associations
- Small business investment companies
- Mortgage lenders
- Investment broker-dealers
- Credit card companies
- Insurance companies
The type of financial institution typically defines the type of activities or financial transactions it engages in. For example, mortgage lenders make home loans while credit card companies extend revolving lines of credit to consumers.
Financial institutions can be subject to regulation by the federal government. Investment broker-dealers, for instance, are regulated by the Securities and Exchange Commission (SEC).
How Banks and the Banking Industry Work
Banks, whether brick-and-mortar institutions or online, manage the flow of money between people and businesses. More specifically, banks offer deposit accounts that are secure places for people to keep their money. Banks use the money in deposit accounts to make loans to other people or businesses.
In return, the bank receives interest payments on those loans from borrowers. Part of that interest is then returned to the original deposit account holder in the form of interest—generally on a savings account, money market account or CD account. Banks primarily make money from the interest on loans and the fees they charge their customers.
These fees can be tied to specific products, such as bank accounts or related to financial services. For example, an investment bank that offers portfolio management to investors can charge a fee for that service. Or, a bank may collect an origination fee when granting a mortgage loan to a homebuyer.
Banking is a highly regulated industry. The Federal Reserve System oversees banks and other financial institutions and coordinates with state regulatory agencies to help ensure banks follow the proper guidelines. Banks are also subject to regulation by other federal agencies, including the Office of the Comptroller of the Currency (OCC), the Office of Thrift Supervision (OTS) and the Federal Deposit Insurance Corporation (FDIC).
Types of Banks
“Bank” is a broad term that encompasses a number of different financial institutions. Understanding the various types of banks matters as they aren’t all alike in the services or products they provide and the functions they serve. Some are consumer-facing, meaning they directly serve the general public. Others play a more strategic role in the flow of money through the economy. Take a peek under the banking umbrella. You’ll find the following:
- Central banks
- Retail banks
- Commercial banks
- Investment banks
- Shadow banks
- Savings and loan associations
- Credit unions
Analysis: This article was necessary read to help myself better understand what banks do for people and how they impact our day-to-day lives. In discussing the large number of services and products banks provide, I learned that banks primarily make money on interest from loans and the various fees they might charge their customer. From this reading, I now understand that Huntington is a commercial bank that caters to businesses and corporations in addition to individuals. When a customer goes to pick a bank, they compare the services and products provided, the type of fees and rates, along with convenience. This is important to know when researching and finding ways to make Huntington more appealing to different groups of customers. It makes me question what ways we can shift their business to make their services more widespread and affordable to the public. I also wonder how digital banking can be made more personal and convenient for customers, along with how the in-person banking experience can stay relevant in this digital age.
Citation:
Lake, R. (2023, July 27). What is a bank and how does it work?. Forbes.
https://www.forbes.com/advisor/banking/how-do-banks-work/
