Oct 05, 2022

Choosing the Right Type of Banking and Understanding Their Functions

  • By DEIRDRE MATHIS,
  • 123 Views
Explain-Different-types-of-Banking

The simple transactions and deposits in the bank might seem easy, but it has more layers. If you are exploring the correct type of banking, this article might just hit right.

Different banks have different functions concerning the distribution of funds, investment schemes, and collection of funds. It is essential to understand each type of banking to figure out the mode of investment that suits you the most.

The following section will break down different types of banking for you and also highlight the function of each of the banks. Read on to know more.

What is Banking?

The finance industry has a lot of institutions within the domain, and each of them has two divisions – the public and private sectors. Banks and finance companies are dynamic mediums between people who want to invest and people who want to borrow money.

Each sector has a different bank that can fulfill the needs of the individual or institution. Apart from receiving cash deposits and lending them money, banks offer facilities like SIP, savings accounts, and deposit schemes.

Getting into the basics and understanding the basic accounts one can maintain at the bank through the following pointers.

  • Savings Account: This account is like a usual bank account where one can deposit the money and get interested in the account’s funds. The interest rates vary between different banks.
  • Current Account: This account is mainly maintained by businesses to deposit their liquid amount. No interest rate is applicable on such accounts.
  • Fixed Deposit Accounts: As the name suggests, it is an account with a fixed sum of money deposited for a fixed period.
  • Recurring Deposit Account: This account is maintained for regularly depositing a sum of money. The interest rate applies to the recurring amount.

Now that the basics are laid out, it is time to move on to discuss banking at another level. The section below discusses different types of banking and their relevance.

8 Different Types of Banking Institutions

The only reason banking is divided into different segments is because of the clients and individuals they serve. Larger financial institutions target businesses, whereas small banks are for individuals.

Below are different banking organizations that one can rely upon for multiple needs.

Central Banks

This government-led institution heads all the other public banks and controls their activities. The central bank is the head institution in every country and supervises the financial activities based on their benchmark.

They are responsible for fixing the interest rates, distributing the currency, and making strategies to deal with inflation or deflation. The central bank curates all the monetary policies and calculates the country’s financial status every year.

Retail Banks

This is the bank that we all are familiar with. An average brick-and-mortar bank where you can have a savings account, collect cash, deposit money, or have fixed deposit accounts. If the retail bank falls under the public sector, it will be moderated by a central bank.

Retail banks can have their websites and other digital tools available to the public. These banks can also provide small-scale loans to the public for their personal or other requirements.

Commercial Banks

As the name suggests, commercial banking is for small and large-scale businesses. A company or enterprise can open a savings account, seek loans, transfer funds, and get access to credits from a commercial bank.

Commercial banks focus on supporting businesses with complex processes like currency conversion, managing cash flow, and doing overseas business smoothly. Solving the queries about taxes and other financial compliances is fulfilled with the help of commercial banking services only.

Investment Banks

Investment banking majorly deals with business funding, stock trading, and many more responsibilities associated with the domain. It looks after business mergers and secures each company regarding financial compliance and funding advisory.

Investment banks are responsible for carrying out smooth mergers between two companies or regulating the business acquisition process. Many businesses and start-ups require systematic guidance on raising funds for the company. Investment banks help in this process and manage investment portfolios for government fundraising.

Cooperative Banks

This type of banking could fall under commercial or retail banks, depending on their nature. They are different from typical banks because the regulation depends on the local community and their needs.

The community’s behavior and statistics determine the operations of a cooperative bank. This type of bank is present in almost every country and state to offer loans to the local community. They have a democratic system that believes in serving the community first.

Credit Unions

Credit unions are unique, and the owners are primarily investors, unlike other banking services. The union belongs to people who seek help from the bank, and credit unions are primarily not-for-profit organizations.

Credit union depends on where the customers/investors live, their occupation, or the organization they work with. Many credit unions are formed by the employees of an organization with a set of rules and regulations. It is like a small-scale bank but with flexible regulatory norms.

Savings and Loans Associations

Technically, these are not like typical banks, and the amount used for mortgages is the ones that the members or investors deposit. They also work like cooperative banks, and members can earn better interest rates than commercial banks.

Savings and loans associations are helpful for small-scale needs like refinancing, renovation of homes, and other miscellaneous needs.

Final Words

By researching different banking systems, it is clear that every bank has a different purpose. These institutions contribute to the marketplace differently, and they are essential parts of a dynamic economic setup.

It is necessary to be aware of different types of banking to be able to seek help for individual or business needs accordingly. With proper research and understanding of the functions of each banking institution, you are sure to come to the right solution for your monetary issues.

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