A mutual savings bank is a financial institution that is chartered by a regional or central government and owned by its members. In the United States, its origins can be traced back to 1816 — a time when the traditional banks only served commercial or retail customers. These banks offered small depositors a place where they could deposit their savings in an interest-bearing savings account.
Find out the nature of mutual savings banks in greater detail, how they differ from other types of banks and some of the challenges they face.
- Mutual Savings Banks Described
- Mutual Savings Banks vs. Credit Unions
- The Struggles of Mutual Savings Banks
- Should I Deposit Money in a Mutual Savings Bank?
Mutual savings banks invest in mortgages, loans, stocks, bonds and other financial instruments. Unlike larger banks, they do not have capital stock. Hence, the depositors own the business and share in any profits earned by the bank. As of 2015, approximately 98% of mutual savings banks are insured by the Federal Deposit Insurance Corp. and fit the FDIC’s definition of a community bank.
Due to these 19th century origins, the Northeast and mid-Atlantic states tend to have a higher concentration of mutual savings banks, though they also have a significant presence in the South. Also, given the community focus, a majority of these institutions focus on mortgage lending.
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By learning about mutual savings banks, one might assume that they are the same as credit unions. Although the two types of institutions have similarities — both mutual savings banks and credit unions accept deposits and provide loans — they also differ in some critical areas.
For one, credit unions do business in the not-for-profit sector. Should they earn anything in excess of their expenses, any profit would go to the community or back to their customers.
Secondly, they also limit their customer base to a specific group of people, such as a community or people in a particular profession. While a mutual savings bank may serve a community, it does not require a customer to live in a specific locale.
Additionally, the National Credit Union Association insures credit union deposits. Although deposits receive a form of federal insurance, it does not come from the FDIC.
Mutual savings banks have faced challenges for unexpected reasons. For one, banking depends more on technology. To stay competitive, banks must invest heavily in cybersecurity, as well as develop the information technology infrastructure for electronic banking — specifically online platforms and apps.
Cynthia C. Merkle, president and CEO of Danbury, Connecticut-based Union Savings Bank, blames margin compression for leaving little room to invest in financial technology. She said that increasingly, banks have to merge to finance the cost of this tech infrastructure, according to the Hartford Business Journal.
This is important as banks earn money by loaning out that money at interest. The bank attracts the capital for loans by paying depositors interest for depositing funds at their bank. For this reason, low interest rates compress margins as they lower rates both for loans and for depositors. They also leave little incentive for depositors to leave money in a bank.
Low rates, however, offer other opportunities for profit, such as increased demand for loans.
Despite facing significant challenges, mutual savings banks have managed to survive and continue to play a critical role in banking and mortgage lending. Still, the 2008 financial crisis left an indelible mark on how many perceive banks.
The fact that many large banks hold more in deposits than they did before the financial crisis speaks to the continuing appeal of these institutions. However, the cost of the bank bailouts also bred resentment, especially since large-bank CEOs escaped prosecution for criminal practices — even as millions of people lost their homes. Also, the Wells Fargo scandal may have further bred mistrust of large institutions.
Consequently, many might prefer the personal touch and understanding of a specific community offered only by a local institution.
Still, in the end, mutual savings banks provide only one of many choices consumers can make to meet their banking needs. When searching for a financial institution to bank with, always evaluate its interest rates, potential fees and services offered. From there, you can decide whether a mutual savings bank best suits your needs.
Click through to find out about the best credit unions of 2020 that anyone can join.
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