How your bank can make or break your financial life. If you choose the wrong bank, it can cost you money or create huge headaches in the future, but if you choose the right one, it could save you hundreds of dollars every year and give you peace of mind that your finances are in order.
A Quick Overview of How Banking Works
The term banking refers to either the business of providing financial services such as taking deposits and extending loans or the act of conducting financial transactions with a bank.
The latter definition is what we’re going to talk about here. When you deposit money into a checking or savings account, you’re actually loaning that money to your bank (for a fee). Your bank then invests this money in stocks, bonds, or other securities in order to generate interest income on your behalf.
In exchange for letting your bank use its money, they pay you an interest rate on your deposit.
These rates vary depending on how much risk your bank perceives.
For example, if inflation is high and there’s no sign of it slowing down, banks may have to offer higher rates because the value of the dollar will be decreasing over time.
If inflation is low but interest rates are high because the economy is strong, banks may offer lower rates to try and attract customers who want to keep their money safe from possible economic downturns.
It’s important not just to compare different types of accounts when looking at interest rates but also at different types of banking institutions as well.
Some banks might give you more favorable terms than others depending on how much risk they think they can handle while still making a profit.
These are called high-yield accounts.
Types of Banks
The four major types of banks are retail banks, investment banks, commercial banks and credit unions.
Retail Banks
This Bank offers a variety of services to individuals such as checking accounts, savings accounts, loans (personal), mortgages and credit cards.
Investment Banks
Investment banking provides capital to companies in return for ownership equity.
Commercial Banks
Commercial banking focuses on businesses with needs such as payroll service or lending money
Credit Unions
Credit unions are owned by their members who share an affiliation such as where they work or live.
These types of banks provide many different features that might be best suited for you depending on what your needs are. For example, if you have a lot of investments, you might want to go with an investment bank.
If most of your transactions are using cash instead of checks or other forms of payment, then it would be wise to go with a bank that offers free ATM access.
It is important to do your research before choosing a type of bank because there are pros and cons associated with each type.
Other Types to Know About
Private Banks
They are mostly for wealthy individuals that have at least $1 million in assets which the Securities and Exchange Commission defines as those who have a minimum of $750,000 in investable assets.
Online Banks
They are banks that have no physical locations and exist entirely on the internet and they are now the new trend that maximizes convenience.
With an online bank, you can perform all of your banking transactions from anywhere you are using your smartphone.
Savings and Loan Banks
Savings and Loan Banks are technically not banks in the traditional sense.
These are organizations owned by financial institutions that offer mortgages, refinance loans, and alternative home loans using deposited savings.
Shadow Banks
Shadow Banks are also referred to as Market-Based Lending.
This banking platform is not governed by the same rules that other major banks need to comply with.
Challenger banks
These banks are called Challenger Banks because they are challenging the traditional way of banking.
Things to Consider When Choosing A New Bank
Choosing a bank can seem overwhelming. With so many to choose from and so many different services to choose from, it can be difficult to know which bank is best for you.
Below are some listed factors that might help you find the perfect banking partner:
l What type of account do you want?
l What features does your chosen bank offer?
l What style of banking does your chosen bank offer (online or physical)?
l Does your desired financial institution have branches in your local area?
l Do they offer low-interest rates on checking accounts?
l Do they have competitive interest rates on savings accounts?
l Are there any fees associated with their products?
l Is customer service available 24/7?
l Can you receive notifications about transactions through text message or email?
l Is online banking easy to use and reliable?
l Is mobile banking easy to use and reliable as well as secure?
l Can I see all my account balances at once without having to log into each one separately?
These are the things you should find out before choosing a bank to partner with and for a long period.
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