What Are the Different Types of Financial Institutions?

There are several different types of financial institutions, each with slightly different features and benefits to their customer. Most people only associate financial institutions with banks, not really realizing that there are many types of institutions that fall under the blanket of financial institutions.

Financial institutions usually fall into two sub categories: banks and non- traditional banks. Banks are what most people tend to associate with the words "financial institution."

Banks

When it comes to financial institutions, many people think first about their personal banking institution. For some it may be a savings bank, for others it may be a credit union and still for others, the word bank may refer to a nationwide chain or a national bank.

There are actually four categories, or classifications, under the word bank when it comes to financial institutions. They are:

• Commercial
• Savings and loan
• Credit unions
• Internet banks

By definition alone, a bank is a financial institution where deposits can be made, all of which are insured by federal government. For example, in the case of a commercial bank or savings and loan, the deposits are guaranteed by the FDIC (that is the Federal Deposit Insurance Corporation). Other financial institutions may guarantee their deposits through a non-federal organization such as the National Credit Union Administration which insures the funds in a credit union.

Commercial Banks. Most people patronize commercial banks. Commercial banks tend to offer an array of services that cater to their consumer base. Commercial banks typically do not offer the highest interest rates on deposits for their consumers.

Savings and Loans. These banks may offer less products than a commercial bank; however, they cater to their members by providing a higher interest rate on deposits than a commercial bank.

Credit Unions. A credit union is basically a bank which is owned by its members. Credit unions decide what market they want to serve such as the employees of a certain company or the residents of a certain city. Since they are often non-profit organizations there is no real push to give profits to shareholders.

Internet Banks. The newest type of bank, the Internet bank, pays higher interest rates on deposits with a lower rate for loans because there are fewer expenses to be paid. There are no physical branches, so there are less employees. The Internet convenience, combined with the higher rates and lower loan rates, are why some people may find banking via an Internet bank attractive.

Non-Banks

When we talk about non-banks as financial institutions there are three major types of companies that can fall under this financial blanket. They are:

• Mortgage firms
• Mutual fund corporations
• Brokerage firms

With these types of institutions you open an account by taking out a loan, buying a mutual fund or opening a trading account. You can deposit money into your account by paying on your loan or buying mutual funds or stocks. You can withdraw money by writing a check or having the institution write a check to you.

Some brokerage firms are issuing ATM cards and credit cards as well as making loans. However, there is no federal deposit insurance guarantee, and mutual funds and trading accounts function differently than bank accounts. 

Selecting a Financial Institution

When choosing a financial institution you need to consider your needs. Are you looking to be able to deposit funds and earn a high interest rate on the deposit or are you looking to be able to get loans, mortgages or working capital? Consider if you are looking for a low rate on loans or cash management. Think about your goals and what each financial institution can offer you to meet your needs.

Compare and contrast several financial institutions. Review the strengths of each institution and then take a good look at your financial goals. Once you do this assessment, you will better be able to find the right financial institution to meet your needs. Additionally, consider whether or not you will need to have more than one financial institution that will better help you attain your goals.

For more information on different types of financial institutions you can go to the FDIC website or visit the website of the particular financial institution in which you are interested. You can also contact local financial institutions via telephone if you need more information on membership or accounts.