What Type of Bank Do I Need?

Banks are complex institutions but essential to the American way of life, allowing you to manage your finances in a safe and secure way.

The first banks in existence were only allowed to accept deposits of money or valuables for safeguarding and identifying or exchanging currencies among jurisdictions. Banking has evolved quite a bit over history and the best bank accounts can be found at several kinds of banking institutions.
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As a consumer, there are a variety of types of banks for you to choose from that allow you to do simple things like save money or engage in more complex financial transactions, such as borrowing from them to buy a house or car.

The following are explanations of the most common forms of financial institutions that average consumers commonly turn to for banking services:

Commercial Banks

Commercial banks are the most common and general form of bank. The term “commercial” used used to differentiate them from “investment banks,” which focus on capital market activities. They are privately-owned by stockholders and offer a very wide variety of services for both individuals and businesses such as deposit accounts, credit cards and loans.

Commercial banks are often referred to asĀ  “full service” banks because of the range of financial services they provide.

The primary functions of commercial banks is to receive demand account (checking account) deposits and make loans. They make money by issuing loans from their pool of deposits. Due to the majority of these deposits being pay on demand, commercial banks primarily offer short-term loans. They also charge fees for services, such as monthly account maintenance fees in order to generate additional revenue.

The greatest advantage of banking commercially is the convenience and availability of banking services. Commercial banks appeal to the average consumer because they supply popular, every day accounts like checking and savings as well as mortgage loans. It is also very easy to find a national or local commercial bank near you. Even if you can’t locate a branch, most commercial banks offer online banking as well.

National Banks

Though national banks differ from smaller community banks, this does not necessarily mean that they operate in more that one location. A national bank is part of a system of federally chartered banks and may have only one branch.

National banks were first formed in the 1860s when there was no uniform currency for the nation. The federal government created the National Banks Act, which approved the chartering of banks that would issue notes, backed by government bonds and taxed at 10 percent. National bank notes are no longer needed because the United States has its own singular form of currency, but this form of financial institution still exists.

Now, a national bank is defined as any bank within a system of banks chartered by the Office of the Comptroller of the Currency (OCC), a division of the U.S. Department of Treasury, and operated by private individuals. Since 1913, all national banks have been legally required to be members of the Federal Reserve System and insured by the Federal Deposit Insurance Corporation (FDIC).

Local Banks

A local bank operates in a single neighborhood or small geographical area and is usually owned or controlled by the people living there as well. They offer many of the same accounts and services as larger chains, but their focus is simply directed toward the local community instead. Loans are meant to benefit the neighborhoods where depositors live and work and the board of directors is made up of local citizens who wish to advance the interests of the towns and cities where these banks operate. The rates tend to be higher and fees lower, as well.

A huge advantage of banking locally is the convenience of banking near where you live. In addition, many people choose local banks over national chains because of the personal touch they offer. It can be much easier to develop a relationship with a local bank and receive a higher level of customer service.

Not all local banks are insured by the FDIC, though, and it is important to research the financial stability of your local bank before investing with them.

Online Banks

Online banks allow customers to do all of their banking over the internet without ever having to step into an actual branch location. These banks often have very low overhead costs, as opposed to brick and mortar banks, and can pass on the savings to their customers in the form of competitive interest rates.

The internet revolutionized the way banking transactions could occur. Online banking existed only in its most basic form in the 1980s,when customers could view their account balances using a monitor and a phone line. By the 1990s, customers could begin signing in and making transfers in addition to simply viewing accounts.

Online banks are still a fairly new form of bank. Many brick and mortar banks are offering more online banking services as time progresses. You may choose to visit a physical branch or do your banking over the internet with most banks presently.

True online banks, however, only operate via the internet (and usually the phone and mail). They are subject to the same rules and regulations as any other bank and are safe as long as you bank over a secured connection. They also operate under the guidance of the Electronic Funds Transfer Act of 1978, which establishes the rights and liabilities of consumers who choose to transfer funds electronically.

Any routine service can be performed through an online bank, such as account transfers, viewing statements and paying bills. Many online banks also make it possible to apply for loans and credit cards, too. All of these things can be done in a matter of mere seconds without the need of standing in line or talking to an actual person.

Aside from the higher interest rates, online banks are also much more convenient. You can access online bank account information at any time, from anywhere. You never have to leave your home or office to bank if you so choose. Most online banks update account information daily and some can even do it in real-time.