There are many different options for banking today. This is true even if you are firmly in the middle economic bracket. In order to decide how to structure your financial strategy to the best possible effect, it pays to be aware of how the most common banking institutions and what they have to offer. So let’s dive into understanding the 4 common types of banking institutions.
Here are some of the basics about community banks, credit unions, international banks, and online banks. Understanding the differences will help you make decisions that are right for your financial planning.
Community banks are financial entities that are owned and operated at the local level. There is no affiliation with a larger bank. All of the funding sources are found in the immediate community where the bank operates branches. In addition, the target customers for this type of institution are usually individuals who live in the area and business owners who operate in the same community.
The typical community bank offers a full range of financial services. The bank will have options for checking and savings accounts. Mortgages and other types of loans are also included. This type of bank will offer other types of accounts, including certificates of deposit. It’s not unusual for a community bank to provide safe deposit boxes for individual and business customers.
One of the advantages of doing business with a community bank is that people who live in the community make all decisions about mortgages and other types of loans. There is no higher chain of communication that must be consulted in order to approve or deny an application. This allows the loan officers to make decisions based on factors other than credit scores and data that larger banking institutions routinely utilize. That’s because the officer knows the community, the current challenges faced by those who live there, and the local business climate.
There are a couple of potential drawbacks that you will want to consider. A community bank may or may not operate with the same level of technology as a larger institution. This could limit options in terms of being able to manage your accounts online. A second concern is whether or not the community bank will remain an independent entity. It’s not unusual for larger banks to purchase community banks, re brand them using the name of the larger entity, and essentially assimilate the community bank into the larger network.
Credit unions are more like cooperatives than banking institutions, although the typical credit union offers most of the services that banks provide to their customers. The difference is that those who choose to participate by establishing accounts own a credit union. With this type of structure, they are considered non-profit entities and enjoy the benefits of being exempt from most forms of taxation.
The strength of a credit union lies within the deposits made by the members. When and as any profits are generated by the collective wealth of those deposits, it’s used to enhance services to the members. For example, it’s possible to obtain a mortgage or car loan from a credit union. The interest charged for the duration of the loan is considered profits that are used to fund more projects for the membership. There are no shareholders to receive dividends and the focus is on providing services to those who qualify for membership.
Credit unions may be local only or they may operate on a national basis. It’s not unusual for these types of institutions to be formed for the benefit of people working in a specific field or who live in a specific area. For example, there are credit unions for teachers, people who work for telecommunication companies, and even those who are members of a specific religious faith or sect.
Some of the benefits that members of credit unions enjoy are services that do not incur fees. Members can establish savings and checking accounts, apply for loans, and participate in some investment opportunities. Today, many credit unions are part of larger networks that make using ATM machines operated by other institutions possible.
In terms of potential drawbacks, the typical credit union will offer fewer options for financial services. The amount that you can borrow may also be somewhat limited in comparison to other institutions. This is especially true for unsecured loans. It’s not unusual for credit unions to operate with technology that’s not cutting edge. That can be a concern for people who are used to technology-based services that large banks offer.
International banks are financial institutions that are based at a foreign location. These banks typically seek clients who live in one country but want to take advantage of banking opportunities in a different nation. While there are exceptions, many international banks do not establish accounts for citizens residing in the same country.
In terms of services, international banks offer checking and other forms of deposit accounts. That includes time deposits that are pledged for anywhere from a year to five years. Many of the accounts are structured to earn interest as long as the balances remain over the minimum required.
There are a number of benefits associated with establishing accounts with an international bank. One has to do with protecting assets. While assets held by a domestic bank may be subject to seizure in order to satisfy a lawsuit, the funds placed in international banks can’t be touched. The same is true for any investments that are made through an international bank.
Many people use international banks as part of the preparation for retirement. Doing so allows them to take advantage of competitive interest rates and build more wealth. For those who plan on settling in an international location after retiring, having those accounts in place can make the transition simpler.
When considering the idea of establishing accounts with an international bank, always become acquainted with the banking laws and regulations that apply in the area where the bank resides. While many of those regulations may be similar to those found at home, others will be different. This approach makes it easier to decide if the country where the bank is based would work best for your purposes.
Online banks do not operate physical locations. All transactions are conducted in a virtual setting. That includes deposits, withdrawals, funds transfers, and other essential tasks. Since the operation is online, a depositor is able to access his or her accounts any time of the day or night.
One of the key benefits of an online bank is that geography does not limit the ability to conduct your banking. Most online banks are part of ATM networks that make it easy to use debit cards in most locations. Since these institutions don’t have to maintain physical branches, they tend to charge lower fees while providing more competitive returns on investments.
Security is often cited as a benefit of doing business with an online bank. Since the entire operation is based online, the bank is more likely to make use of the latest technology for security as well as operations.
While that sounds great, there are some potential drawbacks. Not all online banks offer basic checking accounts. The process required to deposit a check via an online interface may or may not be simple. With no branches to visit, the ability to speak with a person is limited at best.
Choose the Best Banking Option for Your Goals
Keep in mind that you may have accounts at more than one banking institution. Using a domestic solution like a community or online bank for most of your typical financial needs and using international bank accounts for investing and setting aside funds for retirement might be the combination that you need.
Make sure you understand how each institution works and how those services fit into your financial and estate planning. It won’t take long to settle on the right combination and begin increasing your wealth.
I hope you enjoyed reading about how to Understand the 4 Common Types of Banking Institutions. When you are ready to open an offshore bank account, please visit our offshore banking department.
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Luigi Wewege is the Senior Vice President, and Head of Private Banking of Belize based Caye International Bank, a FinTech School Instructor and the published author of The Digital Banking Revolution now in its third edition. You can follow his posts on trends shaping the banking and financial services industry on Twitter: @luigiwewege
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