Types of Banks
When you are starting out as a new nonprofit, it is imperative to find the bank that will best suit your needs. Selecting a bank requires a basic understanding of what the various types of banks actually do and why there are different types of banks. Keep in mind that as banking laws change, so too will the services a particular bank might offer.
Commercial BanksA commercial bank works with businesses. Businesses have unique needs that consumers do not have. For example, some businesses need a commercial bank that can accommodate a large volume of credit card payments and cash deposits. Commercial banks often also function as retail banks, serving individuals along with businesses.
Commercial banks usually provide basic services such as savings and checking accounts, loans for real and capital purchases, lines of credit, letters of credit, payment and transaction processing, and foreign exchange.
Retail BanksA retail bank works with consumers, otherwise known as retail customers, providing basic banking services to the general public, including checking and savings accounts; certificates of deposit (CDs); safe deposit boxes; mortgages; auto, boat, and miscellaneous home-improvement loans; and unsecured and revolving loans such as credit cards. You most often see retail banks on urban street corners; you probably use a retail bank for your personal checking account. In addition to helping consumers, retail banks often serve businesses, so they can also serve as commercial banks.
Credit UnionsCredit unions are nonprofit organizations owned by the “members” or customers that traditionally strive for service over profitability. These organizations have the same types of personnel as banks. Upper management consists of a board of directors that makes decisions on credit union operations. This board is composed of elected volunteers who are also credit union members who want a say in the operation of the business.
A line of credit is a pool of available money that you can borrow. When you get a line of credit, you can draw up to a predetermined limit. This is slightly different than applying for individual loans to meet a specific need; the line of credit is already approved for your organization to use if and when necessary.
Credit unions are required to limit their membership to people who have a common bond. This bond may be geographic, religious, or occupational, but it must exist or the entity risks losing its status as a credit union.
Credit unions typically offer the same products and services as larger banks. However, some will choose not to offer every product and service, because they do not do the same volume of business as larger banks. Banks can afford to have loss leaders, products that get customers in the door but do not bring in much money themselves. Credit unions are more likely to offer only the products and services that a large portion of the membership is likely to use.
Deposits are insured very much like bank deposits, but the two types of institutions are insured by different organizations. The National Credit Union Share Insurance Fund (NCUSIF), financed by the credit unions and not the federal government, handles all deposit insurance in a credit union. This insurance offers the same level of protection as the more familiar Federal Deposit Insurance Corporation (FDIC), which is financed by the federal government.
Investment BanksInvestment banks help organizations use investment markets. For example, when a company wants to raise money by issuing stocks or bonds, an investment bank helps it through the process. Investment banks also consult on mergers and acquisitions.
They work primarily in the investment markets and do not take customer deposits. However, some large investment banks also serve as commercial banks or retail banks, which is why they are discussed here.
Savings and Loan Associations and Cooperative BanksSavings and loan associations (S&Ls) were originally established in the nineteenth century to provide a means for factory workers and others of limited financial means to purchase homes. After World War II the U.S. government helped build the savings and loans industry by insuring deposits on savings accounts. This encouraged people to save their money, despite federally regulated low interest rates.
Those funds were then used to make loans we all know as mortgages; in particular, the thirty-year mortgage allows a homeowner to pay back the loan with a series of low monthly payments over a long period. With the increased popularity of the money market, fewer people were saving in the more traditional manner, meaning there was less money for savings and loans to lend as mortgages.
Currently, S&Ls handle most traditional banking needs, including business transactions. They are for-profit corporations with investors who hope to realize a profit on those investments.
Online BanksOnline banks are banks that you primarily (or exclusively) use on the Internet. They allow the customer more choice and flexibility. Online banks often offer better rates than physical banks. They claim they do not have the overhead and expenses associated with brick-and-mortar banks, which allows them to pass the savings on to you.
These banks offer most of the same services that retail banks offer. However, keep these points in mind when dealing with online banks:
Obtain and retain the physical address and telephone number of the bank in the event there is a problem.
Maintain extra care when sending sensitive information. You are now handling more than your own personal funds; you are managing funds for the organization.
