It’s pretty amazing, isn’t it? You see banks on almost every corner, shopping area, and downtown every day. Why is it amazing? Well, honestly, when was the last time you set foot inside one? Truth be told, you may need the ATM to get some cash now and then, but going inside the bank itself, almost never. Any yet, there they are, by the dozens in “every town USA”, big and small. Why so many? Let me tell you all about banks and why you need one in the 2020s.
All About Banks – An Entity You May Not Understand
One thing that hasn’t changed much is that a bank is a financial institution licensed by the government to receive deposits and make loans. Banks usually provide financial services, too, such as wealth management, currency exchange, and safe deposit boxes.
I worked for several banks in the 1990s and I got first-hand knowledge of what they do and how they work. They were and still are big well-oiled machines, and although they don’t print the money, they sure “make” it.
There are several different kinds of banks including retail banks, commercial or corporate banks, and investment banks. In most countries, banks are regulated by the national government or central bank. In the U.S., the central bank is known as the Federal Reserve, or simply the Fed.
Banks are a very important part of the economy because they provide vital services for both consumers and businesses. As financial services providers, they give you a safe place to store your cash.
Through a variety of account types such as checking and savings accounts, and certificates of deposit (CDs), you can conduct routine banking transactions like deposits, withdrawals, check writing, and bill payments. You can also save your money and earn some interest on your investment. That, of course, runs in cycles and if you are looking to earn interest right now…well, good luck with that, it’s not an easy task.
You can find some better rates if you stop looking at the corner bank and check out the “invisible” online banks that have continued to grow since around 2010 or so. That means you have to have a little trust and faith that they aren’t any different than the big building downtown. That’s difficult for some to understand.
The money stored in most bank accounts is federally insured by the Federal Deposit Insurance Corporation (FDIC), up to limits of $250,000 for individual depositors and $500,000 for jointly held deposits. That’s even true for the online banks you deal with today.
Banks also provide credit opportunities for people and corporations. The money you deposit at the bank, short-term cash, is used to lend to others for long-term debt such as car loans, credit cards, mortgages, and other debt vehicles. This process helps create liquidity in the market which creates money and keeps the supply going.
Just like any other business, the goal of a bank is to earn a profit for its owners. For most banks, the owners are their shareholders.
One way banks make money is by charging fees for all of the things they do for the consumer. Yes, those $2, $3, and even $5 dollar ATM access fees make them very happy and wealthy, and make you pretty angry. After all, you have to pay to get your own money from them?!?!
Another way they make money is by their manipulation of the check processing system. When you have a problem with it, it can cost you up to $40 for a check that you may not be able to cover, even if it’s just for one day.
Banks also make profits by charging more interest on the loans they make and other debt they issue to borrowers than what they pay to people who use their savings vehicles.
Using a simplified example, a bank that pays 1% interest on savings accounts and charges 6% interest for loans earns a gross profit of 5% for its owners. Banks make a profit by charging more interest to borrowers than they pay on savings accounts.
How Many Banks Are There?
Banks range in size based on where they’re located and who they serve—from small, community-based institutions to large commercial banks. According to the FDIC, there were just over 4,500 FDIC-insured commercial banks in the United States as of 2020.
This number includes national banks, state-chartered banks, commercial banks, and other financial institutions. While traditional banks offer both a brick-and-mortar location and an online presence, a new trend in online-only banks emerged in the early 2010s. These banks often offer consumers higher interest rates and lower fees. Convenience, interest rates, and fees are some of the factors that help consumers decide their preferred banks.
U.S. banks came under intense scrutiny after the global financial crisis that occurred in 2007 and 2008. The regulatory environment for banks has since tightened considerably as a result. U.S. banks are regulated at a state or national level. Depending on the structure, they may be regulated at both levels.
State banks are regulated by a state’s department of banking or department of financial institutions. This agency is generally responsible for regulating issues such as permitted practices, how much interest a bank can charge, and auditing and inspecting banks.
National banks are regulated by the Office of the Comptroller of the Currency (OCC). OCC regulations primarily cover bank capital levels, asset quality, and liquidity. As noted above, banks with FDIC insurance are additionally regulated by the FDIC.
The Banks You Use and Need
Retail banks deal specifically with retail consumers, though some global financial services companies contain both retail and commercial banking divisions. These banks offer services to the general public and are also called personal or general banking institutions. Retail banks provide services such as checking and savings accounts, loan and mortgage services, financing for automobiles, and short-term loans like overdraft protection.
Many larger retail banks also offer credit card services to their customers, and may also supply their clients with foreign currency exchange. Larger retail banks also often cater to high-net-worth individuals, giving them specialty services such as private banking and wealth management. Examples of retail banks include TD Bank and Citibank.
Commercial or Corporate Banks
Commercial or corporate banks provide specialty services to their business clients from small business owners to large, corporate entities. Along with day-to-day business banking, these banks also provide their clients with other services such as credit services, cash management, commercial real estate services, employer services, and trade finance. JPMorgan Chase and Bank of America are two popular examples of commercial banks, though both have large retail banking divisions as well.
Investment banks focus on providing corporate clients with complex services and financial transactions such as underwriting and assisting with merger and acquisition (M&A) activity. As such, they are known primarily as financial intermediaries in most of these transactions. Clients commonly range from large corporations, other financial institutions, pension funds, governments, and hedge funds. Morgan Stanley and Goldman Sachs are examples of U.S. investment banks.
Unlike the banks listed above, central banks are not market-based and don’t deal directly with the general public. Instead, they are primarily responsible for currency stability, controlling inflation and monetary policy, and overseeing a country’s money supply. They also regulate the capital and reserve requirements of member banks. Some of the world’s major central banks include the U.S. Federal Reserve Bank, the European Central Bank, the Bank of England, the Bank of Japan, the Swiss National Bank, and the People’s Bank of China.
Banks Vs. Credit Unions
Credit unions vary in size from small, community-based entities to larger ones with thousands of branches across the country. Just like banks, credit unions provide routine financial services for their clients who are generally called members. These services include deposit, withdrawal, and basic credit services.
But there are some inherent differences between the banks and credit unions. While a bank is a profit-driven entity, a credit union is a nonprofit organization traditionally run by a volunteer board. Created, owned, and operated by participants, they are generally tax-exempt. Members purchase shares in the co-op, and that money is pooled together to provide a credit union’s credit services. Because they are smaller entities, they tend to provide a limited range of services compared to banks. They also have fewer locations and automated teller machines (ATMs).
To access your money, you can use traditional banks’ thousands of ATMs in places where you already shop, like Target, CVS Pharmacy, and Walgreens. Top-rated mobile apps let you manage your finances 24/7. Pay bills, deposit checks, and send or receive money quickly with family and friends through Zelle, right in the app.
If the credit union is federally chartered, it is insured by the National Credit Union Administration (NCUA) in the same way that banks are insured by the FDIC.
Why You Need a Bank
There are many reasons why you need a bank (or credit union), but one of the most important is to have a relationship with a financial institution. Somewhere you can keep your money safe, track it reliably, and make deposits and payments. It’s especially important to have a banking relationship if you are looking to borrow money, such as for a car or a mortgage for a home, as it can affect your credit rating.
While it’s possible to cash checks and get money orders to pay your bills, going without a bank can be more expensive in the long run.
Understanding the banking system is important, now more than ever. Dealing with a bank is important to your credit rating and that is a huge part of your finances.
If you have had a problem with any bank, talk to them and find out what you can do to restore your good rating and have the access to what you need. If you don’t do that, you will be destined to pay higher rates of interest and have your time and ease to get money impaired…sometimes dramatically.
Where do you bank these days? Are you into the online banks and taking advantage of higher rates of interest or do your prefer the big names that you see on every corner?