What Is a Banking System?

When you sit back and think about it, banks are often a huge part of our lives. We deposit our
paychecks, take out loans, and set up savings accounts, all at a bank. But what do banks do?
What are the different types of banks? Let's start finding some answers to these questions by
looking at the different types of banks that make up a banking system.
A banking system is a group or network of institutions that provide financial services for us.
These institutions are responsible for operating a payment system, providing loans, taking
deposits, and helping with investments.

Functions
Banking systems perform several different functions, depending on the network of institutions.
For example, payment and loan functions at commercial banks allow us to deposit funds and
use our checking accounts and debit cards to pay our bills or make purchases. They can also
help us finance our cars and homes.
By comparison, central banks or systems distribute currency and establish money-related
policies. Investment banks or systems conduct trades or deal with capital markets.
Many banks are profit-seeking entities with stockholders. They obtain profits by charging more
interest for loans and paying less interest on deposits. For example, a bank may charge a
3.91% interest rate on a 30-year, fixed rate mortgage, but offer an interest rate of only 0.15%
on a savings account of $100,000.

Types
So, now that we know what a banking system is and how it functions, let's look at four types of
banking systems.

Commercial Banks
Commercial banks, such as community banks, accept deposits and offer business and
consumer loans. At a commercial bank, you can open a checking or savings account, apply for
a car or homeowner loan, transfer money, or pay your bills. Some commercial banks also offer
insurance, investment, and retirement services. While community and commercial banks are
usually chartered by the state in which they do business, some may be insured and overseen
by the Federal Deposit Insurance Corporation (FDIC) and the Federal Reserve Bank.

At its most basic level, a bank is a place to safely keep your money. But beyond
the basics, banks usually offer a wide range of products and services designed to
make managing your money a bit easier.

From car loans to credit cards, there are plenty of banking services you may need
at different stages of life. And with digital options, you can access many of them
right from your phone or laptop. Below is a review of financial topics that may help
you learn banking basics. There’s also a glossary of terms at the end.

Why should I put my money in a bank?

Keeping large sums of money at home can be risky. Even though the odds may be
small, there’s always the chance of loss, theft or even a natural disaster. When you
deposit money in a bank that’s FDIC-insured, you’ll know that it’s protected up to
allowable limits.

Dealing with cash for everyday expenses can be a bit cumbersome. Besides that,
a bank account allows you to track your expenses in a single place, which can be
helpful if you’re monitoring a budget or building a savings account. Paying bills
online can also simplify the process (as opposed to buying stamps and mailing
checks).

Another consideration? Interest. Cash hidden in the cookie jar or under the
mattress can’t multiply. But an account that earns interest pays you just for keeping
your money there. Rates of interest vary from bank to bank, and from account to
account, so you may want to shop around before deciding where to stash your
cash. Here’s more info on ways you can bank and services that are offered:

Ways to bank

Branches
A bank branch is a brick and mortar location where your banking can be done in
person. You might pop into a branch for a roll of quarters or a cashier’s check you
need right away. You may want to rent a safety deposit box to store valuables or
important documents. Or maybe you just prefer talking to a banker in person when
you have questions about how to choose the right products and services for your
financial needs.

Online and mobile banking

Many banks allow you to manage your money from a computer or smartphone—
and lots of customers have embraced these options. In 2017, about half of U.S.
adults with bank accounts accessed them with a mobile phone. 1

Some online banking and mobile apps allow you to bank from almost anywhere on
your own schedule. With 24/7 access, you can do everything from managing
multiple accounts to paying bills to transferring money. For the banks offering
mobile check deposit, simply snapping a photo of the front and back of a signed
check will send the payment to the account you choose—no ATMs or extra trips
involved.

Round-the-clock access also helps some people stay organized. If balancing your
checkbook on Sunday evenings suits you, no problem. As for staying ahead of
your bills, most bank apps can text you a reminder that a bill is due or even alert
you if your account dips below a certain dollar amount.

Consumer and corporate banking

What’s a consumer bank account? Just as you’d imagine, consumer banking refers
to financial products geared toward everyday consumers. Also known as retail
banking or personal banking, it’s the division of a bank that serves the general
public.

Corporate banking, on the other hand, refers to financial products that serve
corporate customers. Also known as business banking, this division of a bank
generally serves a wide range of clients, including small businesses, mid-sized
businesses and large conglomerates that may have billions in sales and offices
nationwide.

Credit unions
Many people wonder how a credit union differs from a retail bank. In general, credit
unions offer the same services as a bank, such as checking accounts and personal
loans. But unlike a for-profit bank, a credit union operates as a cooperative and is
owned by its members.

So how do you become a member? You’ll likely have to be a member of a group to

use a credit union and its services, but this is easier than it sounds. Some credit
unions simply require you to live in a certain town or city. Some cater to employees
who work at the same company. And others affiliate with churches or schools. You
may also be able to join if a relative is already a member.

One thing to keep in mind about credit unions is that they may be smaller than
many banks. So there may be fewer locations, ATMs, credit card options and credit
card rewards programs.2

The FDIC does not insure credit unions, however, the National Credit Union
Administration (NCUA) offers the same type of protection to federally chartered
credit unions.

Online-only banking
While most banks today offer online services, there are also banks that exist solely
online. With lower operating expenses, those savings can often be passed along to
customers in the form of lower monthly fees or higher interest rates on savings
accounts.

Telephone banking
Some banks allow you the option of banking by phone. Simply call a phone
number and speak to a bank employee to do things like check your balance,
transfer money, pay bills or handle other banking needs. If you call outside of your
bank’s regular business hours, you may have to use an automated system that will
take you through the steps necessary to complete your transactions.

Banking products and services

Checking account
When you’re thinking about what services banks provide, a checking account may
be the first thing you think of. This popular type of account allows you to store and
manage the money you use for everyday spending. Once set up, you can use a
debit card or check, which will take money directly from your account, to pay for
everything from groceries to gas to bills. You can also get cash from an ATM or
branch using your debit card and PIN, a unique password you choose to protect
your account.

Savings account
A savings account can help you separate the money you want to save from the
money you need to spend. For many, it’s an easier way to work toward a goal, like
saving for home improvements or building an emergency fund. Most savings
accounts can automatically move money from your checking account into your
savings account each month, so you don’t even have to think about doing it
yourself. An added bonus is that banks usually pay you interest on savings
accounts. That’s free money that may help you reach your financial goals a little
faster.

Money Market Account

An MMA is a type of savings account that often pays higher rates of interest than a
typical savings account. The more you put away, the more you may be able to
earn. But don’t forget that you’ll only be able to make up to 6 withdrawals a month
due to federal laws.

Certificate of Deposit
A CD is a type of bank account where you agree to keep your money in the
account for a certain amount of time, from as little as 6 months to as long as 5
years.

The longer you save, the greater the return. You can always decide to withdraw
your money early. However, there’s a penalty for withdrawal before the end of your
CD term.

Debit card
With a debit card, you can pay for everyday expenses with just a swipe (and
usually your PIN). The money will come straight from your checking account so
there’s no need to carry cash if you prefer not to. Plus, if your debit card is lost or
stolen, you may not be responsible for unauthorized transactions if you report it in
a timely manner. Lost cash, unfortunately, is often lost for good.

Credit card
A credit card lets you pay for items with a line of credit. In essence, you’re
borrowing the money and then paying it back when the bill comes. But remember
that different credit cards charge different rates of interest, so it’s important to know
what you’re agreeing to (so you don’t end up paying too much in the long run). One
way to avoid paying interest is to pay your bill in full each month. You may also
want to watch out for annual fees, especially if it’s a card with perks such as airline
miles or cash back. Shopping around for a credit card with no annual fees is
always an option.

Finance terms 101

ATM
An automated teller machine (ATM) is an electronic bank that allows you to
complete basic transactions without a branch or teller. You’ll just need your debit
card and secure PIN. Some ATMs also allow deposits of cash or checks. While
you don’t need to use your bank’s ATM to access your cash, you might have to pay
a fee to use others. Many credit cards allow cash withdrawals as well, but this
“cash advance” can come with a hefty fee, so be sure to find out beforehand. 3

FDIC
When your money is in a bank that belongs to the Federal Deposit Insurance
Corporation (FDIC), you’ll know it’s safe and secure up to allowable limits. That’s
because the U.S. government protects FDIC-insured deposits in the very rare
event that a bank fails.4 You can use its BankFind tool to see if your bank is a
member and to look up the maximum limit of deposited funds that are insured.

Deposit
Anytime you put money into your account, you’re making a deposit. You can
usually deposit checks or cash at a bank, ATM or even on your mobile
phone. Direct deposit is when your paycheck is transferred to your checking or
savings account by your employer automatically on payday, which can save you
time.

Withdrawal
Anytime you take money out of your account, you’re making a withdrawal. Just like
with deposits, you can take out funds at a bank branch or ATM. When you write a
check, wire money or use your debit card, the money is withdrawn automatically
from your account.

Fees
When it comes to different types of banking products, fees can vary widely. But it’s
also possible to find fee-free accounts and services that will likely suit your needs.
Common fees for services rendered by some banks include monthly maintenance
fees, overdraft fees and ATM fees. If you want to avoid paying extra, it can be
worth shopping around and comparing offers.

Now that you’re familiar with a few more financial terms, products and services,
you may feel a bit more confident about managing your money. The more you
know about what banks have to offer, the easier it may be to make a plan that
works best for your lifestyle and personal financial goals.