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Though they dictate a large portion of our financial lives, many people don't know the difference between the many different types of banks. Discover what each bank does and how you can choose the right one for your needs.

What Is a Bank?

It may seem simple, but it's a question people don't ask enough. Banks play a huge role in our lives, so it's important to fully understand what they are. At a high level, banks are financial institutions that are certified to receive deposits of money and provide loans that allow people to borrow money. However, many banks offer other services as well, including financial advising and currency exchange services.

Some banks only serve a specific set of people, while many others serve the general public. Other types of banks, such as a central bank, serve as regulatory bodies for national governments.

Types of Banks

There are many different types of banks in the world and each serves its own special purpose. Knowing the kinds of banks at your disposal is important for making financial decisions, whether you are hoping to open a savings account or take out a loan. Discover more about the different types of banks and the people they serve best.

Retail Banks

The majority of people are the most familiar with retail banks, as they are aimed primarily at consumers. Typically, consumers will use their local branch for everyday banking and other financial services. These local branches connect to a larger bank that services commercial customers. Aside from having basic banking services, retail banks usually provide financial advisement services and can offer personal loans and mortgages. Unlike commercial banks, retail banks only service consumers and do not provide loans for large businesses or corporations.

Commercial Banks

Commercial banks service primarily individuals and small businesses. Typically, they will offer similar services as a retail bank: The ability to open checking and savings accounts, provide small business loans, and offering other financial products. These types of banks are able to provide loans using all of the deposits funneled into individual accounts. From there, the bank makes money by charging interest on all loans provided to its customers. Individuals may find a commercial bank account appealing because all savings and certificates of deposit are insured by the Federal Deposit Insurance Corporation (FDIC). However, their account interest rates tend to pay out little to no interest.

Central Banks

Central banks serve a more governmental role than the other kinds of banks discussed here. They help their country meet the nation's overarching economic goals. This is done primarily through controlling monetary policy and manipulating the supply of currency. Some other techniques they use to influence the economic state of a nation is by adjusting reserve requirements, buying or selling government securities, and taking actions to sway interest rates.

Cooperative or Mutual Banks

Cooperative or mutual banks can offer the financial products that both retail and commercial banks provide. The only difference is that they operate on a cooperative basis, meaning that the bank's customers own a portion of the bank. This puts cooperative banks in a unique position, as they must answer to both the votes of their customers and national banking regulations. However, many cooperative banks are also publicly traded.

Investment Banks

Investment banks serve as intermediaries and advisers for large corporations, governments, hedge funds, and other financial institutions. Investment banks serve these large organizations by helping them manage complex financial tasks. Some of their primary functions are to help companies provide securities to the public, raise money for expansion, facilitate large mergers, and sometimes even serve as a financial adviser. They charge fees for their services, and often employees work long hours due to the high-stress, high-stakes services they offer.

Private Banks

Like many other banks, private banks offer a suite of financial products and services, but to a much more specific audience. Private banks are traditionally owned by one wealthy individual or a small group of wealthy individuals who provide financial advisement to high earners. Typically, private bank customers must have a minimum balance across various assets or must be associated with an extremely wealthy individual through marriage or relation. The most significant advantage of private banking is having exclusive access to people who understand your individual financial situation and potential connections when searching for a business or other kind of loan. However, private banks typically offer lower interest rate accounts and can be highly changeable if the private banker decides to leave the industry.

Online Banks

While retail banks have traditionally had physical locations, many are beginning to migrate to a purely digital space. Some retail banks now exist entirely online and offer the majority of the financial products that a bricks-and-mortar bank provides. It may not surprise anyone who has waited in long lines at their local branch that the main draw of online banking is convenience. Another advantage of banking online is the higher interest rates they tend to offer on savings accounts, due to their low level of overhead.

Credit Unions

A credit union is a type of cooperative bank that is entirely member-owned. Unlike other cooperative banks, which still need to answer to shareholders, credit unions are beholden to their members (and government banking regulations) entirely. As both a customer and an owner, credit union members can take the money earned from the union and use it to provide higher interest rates for savings accounts and lower interest rates on loans. They are also known for their personalized level of service. However, credit unions are often highly local and have a limited number of locations. They usually have a membership restricted to a defined segment of the population, such as a geographic area, or members of a labor union or the military. They also might lack the wide range of products and services that larger banks offer.

Savings and Loan Associations

Savings and loan associations are mutually owned financial institutions that concentrate on offering mortgages and helping people buy a home. However, they offer many other standard financial services as well, including checking and savings accounts and loans. They were originally created to encourage people to purchase homes and have continued to focus in this area. Unlike a standard commercial bank, a savings and loan association tends to be smaller and more locally-oriented.

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