Banks have been around for a long time, and over time they have become much more complex institutions than what they originally were. The Federal Deposit Insurance Company (FDIC), the government agency created by Congress to maintain stability and public confidence in the nation's financial system, defines a bank as a business that 1) accepts deposits and 2) makes loans. As many of us know from personal experience, today’s banks do a lot more than just those two things, although both continue to be integral services of most banks and financial institutions. Currently there are around 9,000 financial institutions in the United States that provide services to individuals and businesses, allowing them to manage, transfer, and borrow money in various ways. In this article we’ll break down the large categories of financial institutions that exist today and consider some of the pros and cons of each. 

Traditional Banks

A traditional bank is a for-profit business that provides a diverse range of financial services to its customers. With a traditional bank, you can deposit money into various savings and checking accounts, gain access to debit and credit cards, and even receive financial planning or wealth management assistance. Customers also can make payments through traditional bank services and apply for various kinds of loans. 

Traditional banks make money by charging for their services as well as collecting interest on loans or other debts. They are generally owned by groups of stockholders. 

Credit Unions

Credit unions are very similar to traditional banks and offer many of the same services and products as traditional banks, except they are non-profit organizations and in order to access a credit union’s offerings, you must become a member. By being a member, you become a part owner of the union and have some decision-making role to play in the structure of how things are run.

Fintechs 

Some fintechs (financial technology companies) offer financial services that are almost identical to traditional banks and credit bureaus. They operate primarily through technology, however, which allows many of their services to not only be less expensive but also faster. There are some offerings, however, that fintechs often cannot provide to their users (like mortgages); thus fintechs are usually not as comprehensive financial institutions as traditional banks.

Neobanks

Neobanks are a subcategory of the banking-focused fintechs we described above, but what makes it specifically a neobank is that it does not have any physical locations anywhere; everything the bank does happens electronically through a website and/or app. 

Main Differences

While basic banking services can be provided by any of the four entities we described above, there are a few significant differences between them that are worth knowing. 

Insurance

Traditional banks are insured by the FDIC, which means that if the bank fails (i.e. is unable to pay the debts it owes and/or can’t meet its financial obligations to depositors and creditors) the FDIC will step in to reimburse depositors up to a certain amount of money. 

Similarly, credit unions are insured by the National Credit Union Administration (NCUA), which reimburses union members by similar standards as the FDIC if the union fails.

Some fintechs are insured by partnering with an FDIC or NCUA insured institution. Neobanks are similar – in order for your money to be insured, the neobank must have partnered with a traditional bank.

Cost

Like we mentioned earlier, the costs to use a traditional bank over a credit union, fintech, or neobank can vary widely. Generally speaking, fintechs and neobanks are the least expensive options since they use technology to provide most of their services, have fewer employees, and no physical locations to keep in order. They are also more likely to offer no-fee accounts, and to not have balance minimums or overdraft fees which considerably cuts down costs for customers.

Locations

Large traditional banks have locations and ATMS for making deposits or withdrawing money all around the country, whereas smaller traditional banks may only have locations in a specific region. The same is true for credit unions – most of them are regionally-based and only have locations in a smaller geographical area. Fintechs and neobanks, however, are even more limited and may not have any actual brick-and-mortar location you can visit. 

Recommendations

There’s no doubt about it – there are thousands of options for banking in 2024. So how do you decide who to bank with? We have a few recommendations. 

What products or services do you need? 

If you only need a checking account, you may not need a bank or credit union. If you’re looking to apply for a business loan or mortgage, though, you may want to look into a traditional bank that can handle everything under one roof.

What kind of insurance does the institution have?

If you’re opting to go the fintech/neobank route, we highly recommend you do careful research on if it’s insured or not, with what bank it’s insured, and what are the terms of that insurance. Although failures are not the norm, they’re not out of the realm of possibility and it’s better to be safe than sorry. 

What do you value?

Do you care about being able to walk in to a location to conduct your banking? Do you want more personalized services? Can you afford to pay extra fees on your accounts or services? We recommend thinking through the things that matter to you when you think about banking, and then prioritize those things as you research and make decisions about who to bank with. 

Conclusion

Banks are much more complex today than ever before, which provides customers with a lot of options for banking and financial services. Banking, like many things, is often a personal matter and doesn’t have a one-size-fits-all solution, so we encourage you to do your research and then decide what’s best for you, your needs, and your preferences.

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