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Financial Institutions and Their Services

Author: Sophia

what's covered
What do banks do, and why do we have banks in the first place? What financial role do they play in the context of the U.S. economy? We looked at the role that the Federal Reserve—or the bank for banks—plays, but what do the rest of these institutions do? In this lesson, you will look at different financial institutions and their services. Specifically, this lesson will cover:

Table of Contents

1. Financial Institutions

Financial institutions help move money around the United States; they serve as the infrastructure to shift money as a means of exchange around the U.S. economy. They are regulated by the Federal Reserve and provide financial services to both businesses and customers. They impact the money supply in the United States; this, in turn, impacts the rate of growth and the overall general well-being of the economy.

There are many different types of financial institutions, so let’s take a look at those now.

1a. Commercial Banks

Commercial banks are financial institutions that provide everyday banking services to individuals, businesses, and governments. They accept deposits, like checking and savings accounts, and use that money to make loans for things like buying a house, starting a business, or paying for education. Commercial banks also offer services like credit cards, safe deposit boxes, and money transfers. They play a key role in the economy by helping people and businesses manage their money and access credit. Unlike central banks (like the Federal Reserve), commercial banks are privately owned and operate to make a profit.

Examples of commercial banks include banks like:

  • JPMorgan Chase
  • Bank of America
  • Wells Fargo
  • Citibank
  • U.S. Bank
  • PNC Bank
  • Capital One
term to know
Commercial Banks
The banks that provide services to companies and individuals.

1b. Savings and Loan Bank

A savings and loan bank (often called a S&L or thrift) is a type of financial institution that primarily focuses on helping people save money and get loans to buy homes. These banks take deposits from customers, like a regular bank, but their main goal is to provide mortgages and home loans. Savings and loan banks were originally created to encourage homeownership by making it easier for people to get affordable loans for buying houses. While they still offer savings accounts and other services, they tend to specialize more in real estate lending compared to regular commercial banks.

Examples of savings and loan banks include:

  • Washington Federal
  • HomeStreet Bank
  • Webster Financial Corporation (which operates Webster Bank)
  • United Community Banks
  • South State Bank
term to know
Savings and Loan Bank
A financial institution that limits its services to providing loans and accepting deposits.

1c. Mutual Savings Banks

A mutual savings bank is a type of bank that is owned by its depositors rather than by shareholders. This means the people who put their money into the bank (depositors) are also the owners. Mutual savings banks focus on helping people save money and often provide loans, especially home mortgages. Because they don’t have shareholders to pay dividends to, these banks can sometimes offer better rates or lower fees to their customers. Their main goal is to serve their members’ interests rather than maximizing profits.

Examples of this type of bank include:

  • M&T Bank
  • Savings Bank of Danbury
  • Eastern Bank
  • Dollar Bank
  • Harleysville Savings Bank
term to know
Mutual Savings Bank
A type of bank that is owned by its depositors rather than by shareholders.

1d. Credit Unions

A credit union is a nonprofit financial cooperative owned and controlled by its members—people who share a common bond, like working for the same company, living in the same community, or belonging to the same organization. Credit unions offer many of the same services as banks, such as savings accounts, checking accounts, loans, and credit cards, but because they are nonprofit, they often provide lower fees and better interest rates to their members.

Examples of this type of financial institution are:

  • Navy Federal Credit Union (largest in the U.S., serves military members and their families)
  • State Employees’ Credit Union (SECU) (North Carolina government employees)
  • PenFed Credit Union (serves military and general public)
  • Alliant Credit Union
  • SchoolsFirst Federal Credit Union (for school employees in California)
term to know
Credit Union
A nonprofit financial cooperative owned and controlled by its members—people who share a common bond, like working for the same company, living in the same community, or belonging to the same organization.

1e. Non-deposit Institutions

A non-deposit institution is a financial organization that does not accept regular deposits like a bank or credit union does. Instead, these institutions provide financial services such as loans, investment products, insurance, or financial advice, but they don’t offer checking or savings accounts where customers can keep their money.

Examples of this type of institution include:

  • American Express (offers credit cards and loans but doesn’t take deposits like a bank)
  • Santander Consumer USA (specializes in auto loans and personal loans)
  • Ally Financial (provides auto financing and personal loans; although it has a bank subsidiary, its finance company part is non-deposit)
  • OneMain Financial (offers personal loans to consumers)
  • Mariner Finance (provides personal loans and financing)
Let’s look at how Mohammad, our HVAC business owner, might use each of these types of financial institutions:
IN CONTEXT: Types of Financial Institutions

BIZ61

Commercial Banks
Mohammad could open business checking and savings accounts here to manage his daily cash flow. He might also get business loans or a line of credit to buy equipment or cover seasonal slow periods. Commercial banks often offer credit cards tailored for businesses too.

Savings and Loan Banks
If Mohammad wants to purchase or renovate a building for his HVAC business, a savings and loan bank might offer competitive mortgage loans or home-equivalent financing since they specialize in real estate lending.

Mutual Savings Banks
Mohammad could use mutual savings banks to save his business profits in interest-bearing accounts. Because they are owned by depositors, he might benefit from better rates or personalized service. He could also get loans for business expansion.

Credit Unions
If Mohammad qualifies to join a credit union (for example, through community membership or industry connections), he could access lower-interest loans, affordable business credit cards, and personalized customer service that might be friendlier or more flexible than traditional banks.

Non-Deposit Institution (Finance Companies)
For quick financing without strict deposit requirements, Mohammad might use finance companies to get equipment leases, business credit cards, or short-term loans. These can be easier to qualify for but sometimes come with higher interest rates.

By working with a mix of these institutions, Mohammad can access a broad range of financial products suited to different needs—from managing daily expenses to investing in growth and equipment.

term to know
Non-deposit Institutions
The institutions that can offer some services, such as a mortgage, but cannot accept deposits.


2. Banking Services

So, what are some of the banking services that these different institutions provide? These are the services that banks, savings and loan associations, and credit unions will typically offer their customers or members:

Service Description
Checking A checking account lets customers easily deposit and withdraw money for everyday transactions like paying bills or buying groceries.
Certificate of Deposit (CD) A CD is a savings agreement where you deposit money for a fixed period—anywhere from a few months to several years—and earn a guaranteed fixed interest rate during that time.
Line of Credit This is the maximum amount a bank agrees to lend a business or individual. You can borrow up to that limit whenever you need, as long as you repay it on time.
Letter of Credit A bank’s promise to pay a third party on your behalf if certain conditions are met, often used in business deals.
Revolving Credit Agreement A flexible line of credit with no set repayment schedule, allowing you to borrow, repay, and borrow again up to the credit limit, like a credit card.
Point-of-Sale (POS) Terminal Electronic device businesses use to process payments—like the card reader or register at stores.
Automated Clearinghouses (ACH) An electronic system that moves money between bank accounts, commonly used for payroll deposits or automatic bill payments.
Electronic Check Conversion A process that turns paper checks into electronic payments, speeding up fund transfers so businesses don’t wait days for checks to clear.
Electronic Funds Transfer (EFT) The electronic movement of money between accounts at banks, savings institutions, or credit unions, makes transfers faster and more convenient without physical cash or checks.
Zelle and Other Digital Payment Services Fast, secure apps and services like Zelle let individuals and businesses send and receive money instantly using smartphones or online banking, often without fees.
Automated Teller Machine (ATM) A machine available 24/7 that lets customers withdraw cash and perform basic banking tasks from almost anywhere.

As you can see, financial institutions provide many services that we use every day. Therefore, banks and financial institutions are an important part of our economy.

summary
In this lesson, you learned that financial institutions are essential for moving money around the U.S. economy and providing financial services to businesses and individuals. Regulated by the Federal Reserve, they influence the money supply, which affects economic growth and overall well-being. There are several types of financial institutions, each serving different roles. Commercial banks offer everyday banking services like checking and savings accounts, loans, and credit cards to individuals and businesses. Savings and loan banks specialize in home loans and mortgages to encourage homeownership. Mutual savings banks are owned by their depositors and focus on providing savings accounts and loans, often with better rates. Credit unions are nonprofit cooperatives owned by members who share a common bond, offering similar services but usually with lower fees and better interest rates. Non-deposit institutions, like finance companies and some lenders, don’t take deposits but provide loans, credit, and other financial products.

You also learned that financial institutions provide many banking services such as checking accounts for transactions, certificates of deposit for fixed savings, lines of credit for borrowing flexibility, letters of credit for business guarantees, revolving credit like credit cards, and digital payment systems like Zelle for instant transfers. Technologies such as ATMs, electronic funds transfer (EFT), automated clearinghouses (ACH), and electronic check conversion make moving money easier and faster. Together, these institutions and services form the backbone of the economy by helping people and businesses manage and move money efficiently.

Source: THIS CONTENT HAS BEEN ADAPTED FROM RICE UNIVERSITY’S “INTRODUCTION TO BUSINESS”. ACCESS FOR FREE AT OpenStax. LICENSE: CREATIVE COMMONS ATTRIBUTION 4.0 INTERNATIONAL.

Attributions
Terms to Know
Commercial Banks

The banks that provide services to companies and individuals.

Credit Union

A nonprofit financial cooperative owned and controlled by its members—people who share a common bond, like working for the same company, living in the same community, or belonging to the same organization.

Mutual Savings Bank

A type of bank that is owned by its depositors rather than by shareholders.

Non-deposit Institutions

The institutions that can offer some services, such as a mortgage, but cannot accept deposits.

Savings and Loan Bank

A financial institution that limits its services to providing loans and accepting deposits.