There’s a lot more to “banking” than most people realize. Not all banks are created equal, or for the same purposes. Some of them cater to individuals on a local basis, others are geared toward investors, some are for employees of a certain company or industry, and others focus on serving the banking needs of businesses, etc. Here are the most common kinds of banks found in the United States.
A local (or community) bank is a brick-and-mortal retail bank that services the banking needs of the local community. A local bank operates as a consumer and a wholesale or commercial bank. The bank manager is generally known to the community, and is usually active in civic activities and even local government. This type of bank handles all aspects of banking activities for the community, including bank accounts, bill payment, money transfers, consumer and commercial loans, insurance and insurance services, and retirement and investment services. Banking careers found in a local bank are tellers, bank managers, loan officers, credit analysts, and often, retirement and financial advisers. Local customers usually have their employment checks deposited here, borrow money for their homeowners’ loans and their auto loans, and keep their savings here. If the customer is a business owner, he or she may also have a credit line arrangement with the bank to operate the business. Local banks are typically chartered by the state of residence, but can be supervised and insured by the Federal Deposit Insurance Corporation and the Federal Reserve Bank.
Most local banks’ employees know all their customers, because the staff is also usually drawn from residents of the community. Because of this, the staff is frequently given much more authority to make decisions regarding the customers’ accounts and service than would be acceptable in a large bank’s branch location. Many local banks are managed not only by a local resident who is the bank manager, but are family-owned banks that have supported the local populace for a number of generations – with many relationship ties to the community. This can both help and hurt a local bank. The bank’s customers may have loyalty to the bank, and may prefer to do all their banking locally, but the very fact that the bank’s staff knows everybody in the community may encourage substandard business practices.
Certainly the older generation is familiar with and prefers to use the services of their own local community banks, the familiar staff, and the local bank’s products and paper accounts. The younger generation, being computer literate and rarely without a cell phone, is more and more inclined to avoid the “old fashioned” local-bank way of banking, preferring instead to use online and telephone services. Online loan services and products, with their search engines that find the consumer the best interest rate for the desired loan, have made loans easy to obtain, and have rendered many local banks’ loan products obsolete. Large banks with credit analysts and loan packaging services can help any commercial business owner find the lowest rate with the best terms. These innovations in banking, while making banking functions easier and faster for some, have helped to stymie the profitability of many local banks, and have forced many local community banks to close.
A national bank is one that is federally chartered by the United States of America and is an investing member of its district division of the Federal Reserve System. A national bank is also insured by the Federal Deposit Insurance Corporation. In addition, national banks’ charters and operations are supervised by the Office of the Comptroller of the Currency of the United States Department of the Treasury.
Most national banks are large commercial banks, with branches in most states and many of each state’s larger cities. National banks, due to their size, offer any and all types of banking careers found in any other bank, including tellers, bank managers and officers, credit and loan officers and analysts, fraud prevention specialists, information technology professionals, financial analysts, and salespeople. Banking careers in each of these departments will also offer many levels of management positions. The system of national banks evolved out of the National Banking Acts of 1863 and 1864, during the presidency of Abraham Lincoln, at a time when a bank could charter either as a state or a federal bank. The two systems were not coordinated and banks had to follow very few regulations. Some state banks issued their own currencies, most notably, the Confederate dollar. After the acts became law, banks that chose to operate in more than one state were required to charter with the Federal government and the U.S. Treasury, and were required to submit to the Treasury and the OCC’s examinations and audits. The act also strove to secure the national currency based on the securities in the U.S. Treasury, and to severely tax the state currencies in order to discourage any other currency than the U.S. dollar. While the primary concern for these acts appeared to be to ensure a stable and growing national currency, the true reason was the need to finance the Civil War for the Union army. This was done by selling government bonds backed by the U. S. Treasury that were offered by the newly chartered national banks.
National banks in the United States today provide all manner of financial services and loans available, including checking and savings accounts; credit, debit and smart card services; money market funds; mortgage loans and mortgage services; small and large commercial loans and lines of credit; insurance products; investment products and services; stock and bond trading; and global banking services, including foreign cash services and international transfers and payments. Positions for banking careers in national banks can range from front office tellers to loan officers and credit analysts to bank officers and securities traders.
National banks work with the Federal Reserve Bank as investor banks to ensure stabilization and currency control for both the U.S. currency and the U.S. banking system.
Credit unions are a type of bank that operate as a not-for-profit, tax exempt, cooperative financial institution owned by the credit union’s depositors, or members. Depositors must be members of a designated group of people, such as military personnel (active or retired); employees of a school district or a city or county; members of a labor union or employees of a large company; or members of a religious group. Family members of such depositors can also be considered as members of a credit union. A member of one of these groups must “join” the credit union first before being able to open an account or borrow money. Credit unions are governed by a board of directors, and the directors are voted onto the board by the members or shareholders of the credit union. Credit unions can incorporate under state or federal law, except in Wyoming, Delaware, and South Dakota, where credit unions cannot incorporate under state law and must be federally incorporated.
Credit unions offer similar services to their members, or shareholders, as do banks, but the services are usually titled a bit differently: savings accounts are share accounts, checking accounts are share draft accounts, and so on. Credit unions also offer loans, credit cards, debit cards, ATM services, online banking, and bill paying services. Bank careers in a credit union are similar to a retail and/or a commercial bank, including credit union officer, loan officers, credit analysts, information technology professionals, and so on.
As credit unions are member services institutions, they are not regulated by the any of the banking oversight regulators. However, this does not mean in any way that they are not as large nor as well financed as many national banks. While a depositor’s accounts are insured up to $250,000 by the FDIC, credit union deposits are insured by the National Credit Union Share Insurance Fund (NCUSIF) for up to $250,000 per depositor. The NCUSIF, like the FDIC, is backed by the United States Government but is administered by the National Credit Union Administration. In fact, the NCUSIF has a higher insurance fund capital ratio than that of the FDIC. Also, credit unions typically have a higher equity capital ratio than most U.S. banks. A credit union, by definition, is formed to service the member shareholders, and therefore, is said to be committed to helping the members’ financial status, rather than to simply reap profits. Credit unions often advertise that their interest charged on loans is lower than banks, and that their service charges for share or draft accounts are also lower, due to their not- for-profit status and their member focus.
Most credit unions are comparable to local banks, offering services to the individual consumer, either for personal or commercial needs. Another type of credit union is a commercial credit union, which provides operational and clearing house funds support only to credit unions on a commercial basis.
An investment bank is a financial institution that generates revenue by handling securities transactions for clients. Transactions can involve derivatives trades, market making, mergers and acquisitions, foreign money transactions, commodities, equity securities, and fixed-income products and instruments. An investment bank’s services are referred to as corporate finance. Careers available in an investment bank include financial sales and financial analysts, credit analysts, traders, bank officers, fraud analysts and many information technology positions. Clients of an investment bank can be individuals, commercial corporations or businesses, pension funds, or governments. Prior to the Glass-Steagal Act of 1933, after the banking collapse of 1929 and the Great Depression, banks could mingle both their investment and commercial activities. The Glass-Steagal Act effectively separated the two financial services, and until 1999, all banks in the United States, unlike European banks, were required by law to choose which type of service to offer consumers. U.S. banks operated separately until 1999, when Congress passed the Gramm-Leach-Bliley Act. This Act effectively tore down any barriers in the United States between commercial and investment banking financial services and operations, allowing banks not only to purchase or form insurance agencies, but also allowing for the consolidating of the two differing financial entities into giant behemoth banks that now offer all manner of banking, investment, insurance, and financial services.
An investment bank operates with three different distinct divisions: front office, middle office, and back office, meaning that investment banking careers can be quite varied. The front office is where all transactions, such as purchases, sales and services of the financial products and instruments, are conducted. This can include investment management, global currency trades, merchant and commercial banking, mergers and acquisitions, capital finance and capital raising, derivatives and commodities trading, and proprietary and customer trading. The front office also includes a research division (not to be confused with research analysis for risk assessment, which is discussed below) in the middle office. The front office’s research department’s activities are highly regulated and must remain separated by a type of wall between itself and the bank’s investment activities, since the reports on the bank’s investments can affect the bank’s financial status.
The middle office directs all corporate strategy and risk management activities of the bank, as well as financial control of the bank’s assets, its exposure in the markets, and its profitability. Directors and officers of the investment bank in the middle office oversee all market and credit risks to the bank’s financial statement and assure that no risk or credit errors or manipulation have occurred.
The back office of an investment bank manages and oversees all technology and informational support as well as all operations and transactions conducted by the bank. Compliance departments, maintaining all facets of the bank’s compliance with regulations, both state, federal and consumer, can be located either in the back office, or increasingly, in the middle office, as part of the risk analysis of a bank’s operations.
A retail bank is a financial institution that offers consumer services directly to the individual consumer, such as checking and savings accounts, cashier’s checks, credit, debit and prepaid cards, and sometimes loans and retirement services. Retail banks can be simply a local bank with no branches or a branch of a commercial bank or of a local or a state bank set up to service regional or local individual clients. Credit unions and savings and loan banks could also be considered retail banks, although credit unions generally also conduct some commercial and investment services. Retail banks are referred to in the banking industry as the “mass-market” arm of banks, giving “one-stop shopping” opportunities to customers of the bank, and therefore keeping all financial transactions of the client customer within that one bank. Increasingly, many retail banks have begun to include small business services, such as loans and lines of credit, as well as commercial bank accounts, in order to retain those individual clients who may also need small commercial services in addition to their personal accounts. Banking careers available in a retail bank can include such positions as branch manager, loan officer, bank tellers, and various management positions.
Usually, a retail bank will be a brick-and-mortar bank (in a building and accessible to foot and drive-up traffic) but increasingly today it may be a “virtual” or online-only bank, servicing clients via Internet connection or telephone, only, with no street location for a customer to physically visit. Retail banks can hold deposits, make loans, pay on checks or pay debits for depositors, and any number of banking services for consumers, but they generally do not perform any commercial or clearinghouse services. Retail banks may also offer investment or brokerage services to sell and service investment products, including certificates of deposit, money market funds, mutual funds, and individual retirement accounts and services. Brokerage services at a retail bank are usually accomplished by only the handling of the consumer sale and contract rather than the actual brokerage and investment management services. When a retail bank offers services such as commercial loans, retirement or investment services, it may accommodate its clients with these offerings through a third-party vendor, or the parent bank, possibly because of lack of staff or because of regulatory limitations.
Since the advent of the Internet, online banking access and ATMs (Automated Teller Machines), the savings and loan collapse in the late 1980s and early 1990s, and the financial meltdown of 2008, fewer and fewer retail banks are continuing as brick-and-mortar locations. Increasingly, banks and financial institutions are asking consumers to use direct deposit services, ATMs, smart phones, and computer Internet connections in order to conduct retail consumer banking services. Many banks have begun to charge for face-to-face teller services and even for telephone access to a teller. Consumers without Internet access or who are not capable of accessing accounts online will be expected, in the future, to pay more and more for these types of personal services that banking clients have always, up to now, enjoyed. Banking may become more impersonal, and fewer banks will offer walk-up or drive-up retail services for free, if at all.
A commercial bank is a for-profit financial institution that generates revenue by holding deposits from and making loans to customers, offering various financial services to consumers and earning interest on investments made (usually securities) on deposits. A commercial bank’s customers can enjoy the same services as that of a retail bank, such as savings and checking accounts, certificates of deposits, loans and mortgages, and credit, debit and prepaid cards. The main difference, however, is that a commercial bank typically will focus on commercial clients and short-term loans, or lines of credit, for businesses. A commercial bank could be a single, local bank, a branch of a national or state bank, or a credit union, and offers careers that are similar to those at any other bank. Commercial banks, unlike investment banks, typically loan money to customers using only their own pool of funds and investment income, rather than drawing on outside funds in packaging loans.
Prior to the Great Depression, commercial banks were also investment banks. After the banking collapse in 1929, the U.S. government required banks to limit operations to one of two types of banking: either investment banking (which deals in commercial capital markets) or commercial banking (which offers consumer-direct banking services, such as checking and savings; debit and credit and deposits relating to these accounts; loans and mortgages; and other consumer services). Until the Gramm-Leach-Bliley (GLB) act of 1999, also known as the Financial Modernization Act, commercial banks were prohibited from also selling any insurance services. After the GLB act, commercial banks were able to expand consumer financial services greatly to consumers by also becoming insurance agencies, becoming more and more of the “mass-market” strategic provider of “one-stop shopping” and being able to offer almost all manner of financial services, financial and retirement planning, and saving for consumers.
Today the differences between credit union firms and retail, commercial, and savings and loan banks are a bit blurry to a consumer, particularly after the savings and loan collapse in the late 1980s and the financial collapse in 2008, and also because they all seem to offer the same services. The differencess lie in the regulatory oversight of the different types of banks, thrifts, and credit unions; the respective insuring entities that make a depositor’s accounts safe from loss; the myriad behind-the-scenes financial money markets and clearinghouses; and congressional actions making up the many banking laws and regulations. A smart consumer is wise to do his or her research, shop around for the best price and access for services, and make sure that he or she is comfortable that the financial firm of choice is capable, insured, and willing to provide the services needed.
Those seeking banking careers may find many opportunities for careers and advancement in a commercial bank.
An online bank can be a division or department of any retail, commercial, or investment bank, or it might be a bank that operates entirely online, with no physical location for a customer to walk-up or drive-up to, but that may service all needs of banking customers. Online banks offer many banking job within their firms that are similar to banking careers at local and commercial banks and credit unions. Online banking is referred to as “E-banking” or electronic banking.
Online banks allow a customer to perform almost all banking transactions online, such as checking and savings transactions, bill paying services, account inquiries, and transfers. The customer of an online banking service can access his or her account at any time of the day or night with the use of a computer and a customer or user ID number and a password. Services can also include loan applications and payments as well as credit, debit, and smart card transactions. Careers with an online bank can include loan officers, credit analysts, as well as banking careers positions in fraud analysis, investment, and management.
Customers’ online account balances can be real-time transactions that update the customer’s account immediately as the transaction is performed, or the bank can impose a time delay, offering the bank time to hold deposits or transactions until such time as the requested transaction has passed some type of quality control, typically a software program that analyzes the data to ensure correctness. Some online banks have very sophisticated software that even allows customers to deposit checks with an upload of a picture of the check taken by the customer with a smart phone.
Banks with online services have invested many millions of dollars of secure technology software and oversight in their computer servers and networks to ensure the accounts of depositors against any fraud or illegal access. Commercial businesses have embraced online banking, because ready access to the bank has simplified many aspects of business today, including payroll services, lines of credit, short-term loans, and bill paying services. Those working in banking careers in a company’s business office can deposit or transfer funds, pay bills, accept payment from creditors and pay vendors, as well as deposit payroll funds to the employees’ bank accounts without ever leaving the office. Nevertheless, many people fear online banking and prefer to handle banking transactions at a physical location of a bank. Another disadvantage of a purely online bank is the requirement that deposited or cashed funds must either be mailed by check to the bank or transferred directly from another bank. This is due to the fact that the customer cannot present the check at a location and handle the transaction personally, because the online bank has no physical location for customers. Still, online banking is a vital function of all banks today. All banks are connected electronically to each other, either directly or through a clearinghouse, and all bank records are kept electronically. Electronic access is much more cost effective than staffing a bank with people and tellers, and this transformation will only continue as young people embrace technology and reject face-to-face communication.