Major Types of Financial Institutions

Individuals, corporations, or both can benefit from a wide range of deposit, loan, and investing products offered by a financial institution in today’s economy. Some financial institutions cater to a wide range of customers, while others cater to a narrower segment of the market with a narrower range of products and services.

Deposits, loans, investments, and currency exchange are all examples of financial transactions handled by a financial institution (FI). Many types of financial service companies are included in the term “financial institutions,” including banks, trust companies, insurance companies, brokerages, and dealers in financial investments.

Almost everyone in a developed economy relies on financial institutions on a regular basis or at least occasionally.

Central bank

A central bank is a financial entity that has privileged control over the generation and distribution of money and credit for a country or group of countries. In contemporary economies, the central bank is often responsible for monetary policy development and the regulation of member banks.

Central banks are non-market or even anti-competitive institutions. Despite the fact that some are nationalised, many central banks are not government organisations and are therefore frequently referred to as politically autonomous. Nonetheless, a central bank’s privileges are established and safeguarded by law even if it is not legally controlled by the government. A central bank is distinguished from other banks by its legal monopoly status, which grants it the authority to issue banknotes and cash. Private commercial banks may only issue demand liabilities, like demand deposits.

The duties of central banks (and the justification for their existence) often fall into three categories, notwithstanding the fact that their scope varies greatly by country.

First, central banks regulate and manipulate the national money supply by issuing currency and establishing loan and bond interest rates. Typically, central banks raise interest rates to restrict economic growth and prevent inflation; they lower them to stimulate economic growth, industrial activity, and consumer spending. In this manner, they administer monetary policy to steer the economy and attain economic objectives, such as full employment.

Second, they control member banks using, among other methods, capital requirements, reserve requirements (which determine how much banks can lend to consumers and how much cash they must maintain on hand), and deposit guarantees. In addition, they provide loans and services to banks and the government and handle foreign exchange reserves.

Lastly, a central bank also serves as a lender of last resort to troubled commercial banks, other institutions, and sometimes even the government. When a government wants to increase revenue, the central bank provides a politically appealing alternative to taxation by, for instance, purchasing government debt obligations.

Internet banks

Internet banks, also known as virtual banks, online banks or web banks, do not have any physical branches and operate solely online. Internet banks consistently offer interest rates, particularly money market yields, that are greater than the national average since they don’t have to pay for bank branches.

Internet banks allow users to do banking transactions from anywhere they have an internet connection. They usually don’t own ATMs, but many internet banks cooperate with other banks and organisations to provide free or low-cost ATM access to their customers.

Customers can’t access their accounts if internet service is poor or nonexistent, which is both an internet bank’s greatest strength and its greatest drawback. Security concerns must also be taken into consideration. When using public Wi-Fi to access one’s online bank account, there is a risk of hackers bringing down the website of an internet bank and making one’s account inaccessible.

For the vast majority of traditional banks, their online banking services are almost indistinguishable from those offered by internet banks. This makes it possible for traditional banks to extend their reach beyond the walls of their physical branch network and deliver financial services to customers all over the world.

There are advantages to using a traditional bank as well as an online-only bank. In essence, you must evaluate if the human touch and services of a brick-and-mortar bank offset the often-higher costs of banking there due to lower interest rates and extra fees.

Credit unions

A credit union is a member-owned, not-for-profit financial cooperative that works like a commercial bank. Credit unions usually offer the same kinds of services to their members as retail banks, such as deposit accounts, loans, and other financial services. Credit unions can be made by large corporations, organizations, and other groups for their employees and members. They can be small and run only by volunteers, or they can be big and have thousands of members all over the country.

Credit unions are made, owned, and run by the people who use them. Because of this, they are not-for-profit businesses that don’t have to pay taxes. Credit unions have a simple way of doing business: members pool their money—technically, they buy shares in the cooperative—so that they can give each other loans, demand deposit accounts, and other financial products and services. Any money made is used to pay for projects and services that are good for the community and its people.

The total assets and average institution size of credit union systems around the world vary a lot. Some are run by volunteers and have only a few members, while others have hundreds of thousands of members and assets worth billions of US dollars.

Conclusion

People and businesses alike rely on financial institutions to conduct transactions and invest, and financial institutions are essential to the functioning of any economy. Banking and financial institutions are so crucial to the economy that governments feel compelled to regulate and control them. Financial institution bankruptcy has historically sparked fear.

Because banks can only accept deposits into savings and demand deposit accounts, they are distinct from non-banking financial entities, which can only accept deposits into other types of accounts.