Different Financial Institutions Explained

Most people don’t keep their money under a mattress. While it is a good idea to keep some cash on hand for emergencies or just regular use, any money you keep out of circulation won’t receive any interest and can’t work for you as easily as it can if your money is in a financial institution. It’s therefore likely you are using a bank, a credit union or a brokerage company to deposit your money, but do you know the differences in these options? What makes a bank different from a credit union? Or what is the difference in a retail and commercial bank? Does knowing the difference help you better manage your assets?

1. The Retail Bank – A retail bank is what you likely use most often to take care of your everyday banking needs, like withdrawing cash or depositing a check. Retail banks offer a range of products and services, such as savings accounts, checking accounts, personal loans, debit cards, credit cards or home mortgages, that are geared toward the individual consumer (which is why this subset of the financial industry is also called consumer banking).
2. Commercial Bank – Retail banks are typically a part of a larger commercial bank, which provides the banking services (loans, credit cards, mortgages, checking and savings accounts, etc.) to both individuals and businesses. “For consumers’ purposes, the retail bank is the entity that they’re dealing with,” says Greg McBride, chief financial analyst at Bankrate.com. But the commercial bank will also have a corporate banking side that deals with small companies. Many commercial banks also have an investment banking arm that specializes in products and services for large investors and corporate customers, such as advising on mergers and acquisitions, and trading securities.
3. The Credit Union – Credit unions provide a lot of the same products and services that retail banks do; the major difference is that they are not-for-profit, cooperative financial institutions whose purpose is to benefit their members. They typically serve a particular group of people with something in common, also known as the field of membership. This could include a shared employer, geographic location, religious organization or labor union, for example.
4. A Brokerage Firm – A brokerage firm, or simply a brokerage, is a financial institution that facilitates transactions involving the trade of securities (the Wall Street term for financial instruments like a stock or bond that you can buy or sell). At most brokerages, stockbrokers serve a clientele of investors who trade public stocks or bonds, or want to invest in different types of funds. So if you wanted to buy a stock in a company or put some money into mutual fund, you would need a brokerage to help you do that.

Usually it depends on your needs, appetite for risk and long term goals that drive how your assets are handled. Knowing what financial institutions specialize in what areas can help people make more informed decisions on where to put their money.