Traditionally, there are three types of financial institutions: banks, credit unions, and thrifts. Commercial banks handle about three quarters of the total amount of assets within the entire financial system, but many people prefer thrifts or credit unions. Let’s take a look at each type of institution and some of the differences between them.
Commercial Banks. Sometimes called full-service banks, these are the most widely used financial institutions in the United States, with about 8,000 operating. Commercial banks are permitted to take deposits, loan money, and provide other banking services. They can have either a federal or state charter and are regulated accordingly. Commercial banks vary greatly. They can be huge mega-banks that have sprung up during the past several years or small, community banks. The 300 or so foreign banks that operate in the United States are technically commercial banks. They must comply with federal regulations, but many of them do not offer the banking services that the average customer requires. Credit Unions. These offer many of the same services as commercial banks: checking accounts, savings accounts, vacation clubs, ATM services, and calendars at the holidays. They generally can offer better rates on loans and savings, however, because, as nonprofit organizations, they don’t pay federal taxes. It used to be that only people with common occupation, association, or geographical area could form and join credit unions. These days, however, practically everyone can join a credit union in one capacity or another. Before joining a credit union, make sure it’s a member of the FDIC, which guarantees deposits. Not all credit unions are FDIC members.
Thrifts. These are the financial institutions commonly known as savings and loans (S&Ls). Savings and loans have had a tarnished reputation since the late 1980s, when many of them failed and had to be bailed out by Uncle Sam (that is, taxpayer dollars). Recent legislative changes have greatly improved the quality of thrifts, making them good options for depositors once again. Make sure your deposits are insured by the State Life Insurance Corporation (SLIC). Internet Banks and Online Banking. Many banks today offer online banking, allowing you to access your accounts online to check balances and transactions, pay bills online, and transfer money from one account to another. You may be able to access stock quotes and trade stocks and mutual funds. In addition to online banking offered by traditional banks, there’s a new guy on the block—Internet banks, also called virtual banks or e-banks. They offer most of the same services as traditional banks and are subject to the same federal regulations. They’re convenient, open all the time, and, because they have a much lower overhead than traditional banks, they can offer some big financial advantages to customers in the form of higher interest rates and lower fees.
A disadvantage of virtual banks is that they have no ATM machines of their own, meaning you end up paying service charges to conduct ATM transactions at all ATMs. Also, many e-banks won’t let you deposit money to your account via an ATM, meaning you have to mail a check or transfer money online from another account. Internet banks are aware of this problem, however, and are taking steps to resolve it. Some virtual banks allow you to drop off deposits at Mail Boxes Etc., and others are working out deals with regional ATM networks to allow their customers to use those machines for deposits. No matter how you decide to conduct your banking, interest rates probably will be a factor in deciding what financial institution you choose. These days, interest rates are pretty much low across the board. Still, you should look around and see where you can get the most interest on your money. Even a fraction of a percentage point adds up. And, as you get more money, it makes even more of a difference.
