7 types of banks explained
A bank is a financial institution which allows people ie. customers to save and borrow, and provides other financial instruments such as, current accounts, overdrafts, instants access saving accounts and so on.
Banks usually lend money to borrowers that savers deposited at the bank. The bank then charges the borrower interest, some of which is paid to customers in the form of interest on savings and the rest is usually profit. However, banks are not allowed to lend all the deposited capital out, in case customers wanted to make a withdrawal, as a result banks usually keep reserves. All banks in the UK agreed to maintain minimum reserve ratios of 12t% and finance houses of at least 10%.
How banks make a profit
Banks usually make a profit from the interests that they charge on loans or any other fees that they charge to customers such as monthly account fees on premium accounts. However, banks also make money from capital markets by providing services like sales and trading, M&A advisory and underwriting.
Types of banks
1. Retail/commercial banks
These banks cater to everyday people they offer commercial and personal banking services, such as current account facilities, mortgages and so on to the general public. Examples include Lloyds, Barclays and pretty much any high street banks or the big five. There are also challenger banks which are usually newer including app only banks like monzo and starling.
2. Commercial banks
These usually cater to businesses financial needs providing financial instruments such as cash management and working capital finance.
3. Investment banks
These usually provide investment services like brokerage services, investing clients money, they also help with releasing IPOs and help with mergers and acquisitions.
4. Community development banks/ CD banks
These are privately owned, receiving support from the government that focus on social responsibility.
5. Building societies
These are owned by their members, they’re usually smaller than traditional banks however, they provide the same services as traditional banks. These banks usually provide better rates on savings and borrowing as they don’t have to pay dividends to shareholders so profits can be used to reduce costs for the members ie. consumers.
6. Credit unions
They are very similar to building societies, having members and offering better rates.
7. App only/ online banks
These are one of the offspring’s of Fintech, they are just like traditional banks but usually only operate online, and have no physical branches. They might offer extras like budgeting tools, sending notifications each time you make a purchase and so on.
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