United States financial institutions are an integral part of the nation’s financial services landscape. Each institution serves a certain target market and offers a specific services menu. Some financial institutions conduct business together while others operate independently.
Financial Institutions Defined
In a developed economy, financial institutions are companies engaged in specific types of monetary and financial transactions. Some financial institutions loan investors’ and depositors’ funds to individual or business borrowers who need financial resources.
Certain financial institutions, such as investment banks, only cater to the business sector. Other financial institutions operate within the brokerage, insurance, or mortgage industries.
Banking Institutions
Banking institutions (or banks) are entities that provide consumers and companies with diverse financial services. A bank primarily receives funds (or deposits) from depositors. The bank loans these funds to borrowers who need the funds for personal or business loans, mortgages, and other purposes.
Banks also process payments ranging from account holders’ personal checks to high-dollar bank-to-bank electronic payments. Banks also issue credit cards and debit cards along with processing those sales. Mark Hauser notes that banks often engage in investment activities and facilitate foreign exchange transactions.
Central Banks
Many nations operate central banks, a type of umbrella financial institution that manages the country’s other banks. The Federal Reserve Bank (or the Fed) is the United States’ central bank. The Fed sets the United States’ monetary policy. In addition, the Fed’s regional offices monitor and regulate applicable financial institutions’ operations.
Retail Banks and Commercial Banks
Historically, neighborhood retail banks have focused on consumer services such as savings and checking accounts, loans, and specialty services. In contrast, commercial banks concentrated on the business market.
Today, private equity expert Mark Hauser says the two entities have merged together. Most large-scale banks now serve consumers and businesses alike. These financial institutions offer deposit accounts along with loan services.
To illustrate, retail and commercial banks offer savings and checking accounts along with Certificates of Deposit (or CDs). Credit card services, mortgages and personal loans, and business banking services are also available.
Exclusively Online Banks
Relatively new online-only banks and conventional banks have some key similarities. Both financial institutions support multiple bank account types. Some online banks also offer Certificates of Deposit (or CDs), credit cards, and debit cards. However, online checking accounts are generally not available.
With reduced operating costs, online-only banks minimize fees and offer attractive interest rates. Many Internet-only banks offer Federal Deposit Insurance Corporation (or FDIC) insurance for eligible deposits. Banking services are available via a customer’s mobile device, computer, an ATM terminal, or the bank’s customer support line.
Investment Banks
An investment bank is a specialized financial institution focused on raising capital through issuance of marketable securities. Investment banks partner with private individuals, companies, and governments needing capital for a specific purpose.
Private equity expert Mark Hauser states that investment banks provide targeted expertise during sophisticated financial transactions. To illustrate, a start-up readying an Initial Public Offering (or IPO), or two merger-acquisition participants, might engage an investment bank’s services. Investment banks also provide major institutional clients with financial guidance.
Credit Unions
A credit union is a not-for-profit financial institution that provides most traditional banking services. Each credit union’s members form, own, and operate this financial entity.
As a non-publicly traded organization, a credit union only needs to generate enough income to fund its daily operations. This enables credit unions to offer lower interest rates and fees compared to banks.
For decades, credit unions only served a specific defined group such as a single company or organization. To illustrate, state employee credit unions are relatively common. Today, however, some credit unions have opened membership to the general public. An individual may only be required to join the non-profit organization for a minimal fee.
Savings and Loan Associations
A savings and loan association (or S&L) is also called a savings bank or thrift institution. Born during the 1930s, these customer-owned financial institutions were established to offer affordable residential property mortgages. Throughout the 20th century, many middle-class Americans turned to their local savings and loan association for a home loan.
Although less-prevalent today, savings and loan associations are still an active part of many communities. Besides residential mortgages, S&Ls typically offer checking accounts and personal loans.
3 Additional Types of Financial Institutions
The United States financial services landscape includes three other types of financial institutions. Private equity expert Mark Hauser discusses each entity’s role in the financial services ecosystem.
Brokerage Firms
A brokerage firm serves individuals and investors desiring to execute securities transactions. Traditional securities include stocks, mutual funds, exchange-traded funds (or ETFs), and bonds. Brokers typically trade these securities based on clients’ direction.
More recently, alternative investments such as cryptocurrency have become available via online brokerages. These regulated financial services firms ensure the safety of investors’ funds. In contrast, a crypto exchange is a non-regulated entity without these protections.
Insurance Companies
Insurance companies protect clients (or policyholders) against financial losses from predetermined risks. These financial losses can result from incidents personally affecting the policyholder (usually the insured). Financial losses could also occur due to third-party injury or damage. The non-covered policyholder could be deemed liable for these losses.
Through a contractual agreement, each policyholder receives protection against covered incidents. By pooling policyholders’ risks, the insurance company is able to offer more affordable policy premiums (or payments).
Individuals and businesses can select from multiple types of insurance coverage. Life, health, auto (vehicle), and homeowner’s insurance are the most common types of insurance policies. Many other types of coverage are available.
Mark Hauser explains that certa in insurance companies team up with banks. The insurance company markets its products to the bank’s customers. This ideally creates a “win-win” partnership for both financial institutions.
Mortgage Companies
A mortgage company is a specialized financial institution that solely originates mortgage loans. To obtain the loan capital, mortgage companies collaborate with financial institutions with substantial capital resources.
It’s a misconception that mortgage lenders only make residential loans. Although residential mortgages represent a large market segment, certain mortgage companies only lend funds to commercial real estate clients.
In today’s highly digital world, many mortgage companies conduct their operations via the Internet. The remaining brick-and-mortar mortgage lenders have fewer branch locations. Both tactics allow the lenders to provide borrowers with lower mortgage rates and fees.
Financial Institutions Continue to Evolve
Changing economic conditions and regulatory issues can spur changes in financial institutions’ operations. Private equity principal Mark Hauser recommends that individuals and businesses conduct thorough due diligence before purchasing financial institutions’ products and/or services.
Autor: Gary Johnson
Statements of the author and the interviewee do not necessarily represent the editors and the publisher opinion again.
