Econ Express Personal Finance | Concept 44: Financial Institutions (2024)

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Econ Express Personal Finance | Concept 44: Financial Institutions (1)

A financial institution is a company that provides financial services. In other words, they help consumers and other businesses manage their money. Banks are the most well-known and widely used, but there are many types of financial institutions, and understanding their differences is important when making financial choices.

Banks are the most common financial institution because they offer the most financial services. Checking accounts, savings accounts, home loans (mortgages), car loans, student loans, investment advice, ATMs, direct deposit and foreign currency swaps are just some of the many services banks offer. Most of these services require an account with the bank, and the bank charges fees for some. Banks are owned by shareholders who want to see the bank make a profit by providing these services and making smart loans that people repay with interest. Importantly, money in banks is insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000 per account.

Credit Unions are similar to banks in many ways with one very significant difference. Credit unions are owned and controlled by the members who have accounts in them. To be a part of a credit union, you must meet some kind of requirement like living in a certain area or working for a specific company. Navy Federal credit union, for example, is open to members of the armed services and their families. The benefit of this type of ownership is that the credit union is usually able to offer better terms to its members and more unique loans tailored to specific circ*mstances. The drawback is most credit unions are regionalized and can be difficult to use for people who travel frequently. They also do not usually offer as many services as banks. Money in credit unions is insured by the National Credit Union Association (NCUA), also up to $250,000 per account.

One is not necessarily better than the other, and many people use both banks and credit unions for different services. Ultimately, it is beneficial to your long-term financial health to use either a bank or credit union. The next section describes other financial institutions that people use instead of banks and credit unions that come with greater risks.


Econ Express Personal Finance | Concept 44: Financial Institutions (2)

Payday Lenders and Title Pawn Lenders are examples of financial institutions that have very specific and narrow products. Payday lenders make short-term loans to people who need money right away. The borrower agrees to repay the loan on “payday.” Typically, these loans come with very high interest rates and confusing contracts that get people in trouble. The St. Louis Fed reported in 2019 that the nationwide average interest rate for a payday loan was a whopping 345% (compared to 10-28% for a bank loan). Title pawn lenders also charge extremely high interest rates, but tie the loan to some asset of the borrower like a vehicle, that becomes collateral for the loan. If the borrower fails to repay, the title pawn company can claim legal rights to the asset. As of December 2020, 30 states have outlawed title pawn lenders and 17 states have outlawed payday lenders.

Given these scary claims, why would anyone use these facilities? Payday lenders and title pawn lenders usually require very few - if any - credit checks. Since they are not trying to appease shareholders or members, they can make riskier loans and, therefore, people in emergency situations may find them appealing. While their use is generally discouraged, people who do use them need to be careful to not overborrow and carefully read and understand the terms of the loans.


Econ Express Personal Finance | Concept 44: Financial Institutions (3)

The unbanked population refers to people who do not use formal financial institutions like banks or credit unions at all. Underbanked individuals are people who make mostly cash transactions but may have a few interactions with a bank, like a savings account they rarely use, a credit card or a loan from a local bank. In 2018, the Federal Reserve estimated there were around 55 million unbanked or underbanked American adults. The Center for Financial Inclusion estimates around 1.7 billion adults around the world are unbanked.

Why does this matter? Not having a bank account likely means most legal transactions are being conducted with cash which, of course, requires large amounts of cash to be held constantly. This is inherently less secure than having money in a bank account. If you lose it or it’s stolen, it is gone. Remember that banks offer a wide range of financial services. Not interacting with a bank means unbanked and underbanked people often pay additional fees for services like check cashing, money orders and similar services and have no access to things like direct deposit, which means they may get delays in receiving things like federal payments, their paycheck or tax returns.

Additionally, being unbanked means a lack of records and proof of money management over time. When the need for a loan does arise, unbanked and underbanked individuals find it difficult to get a loan with good terms and often wind up using services like payday lenders. In good news, the FDIC reported in October 2020 that with more online and app-based banking options, the number of unbanked people is falling quickly in the United States.

Econ Express Personal Finance | Concept 44: Financial Institutions (2024)


What is the most common financial institution? ›

Banks are the most common financial institution because they offer the most financial services. Checking accounts, savings accounts, home loans (mortgages), car loans, student loans, investment advice, ATMs, direct deposit and foreign currency swaps are just some of the many services banks offer.

What does credit mean in economics? ›

Credit is the ability of the consumer to acquire goods or services prior to payment with the faith that the payment will be made in the future. In most cases, there is a charge for borrowing, and these come in the form of fees and/or interest.

Is owned by its members and provides services to them at a lower cost than banks do? ›

Credit unions are not-for-profit financial institutions owned by their members. They provide many of the same products and services as banks including checking and savings accounts as well as various loan products and investment accounts like IRAs.

How do banks and credit unions make a profit? ›

They make money from what they call the spread, or the difference between the interest rate they pay for deposits and the interest rate they receive on the loans they make. They earn interest on the securities they hold.

What is the #1 bank in America? ›

Chase is the largest bank in the country, holding over $3.38 trillion in assets. Bank of America is the second-largest bank with over $2.45 trillion in assets. Wells Fargo is the third-largest bank, holding over $1.7 trillion in assets.

What are the top 4 financial institutions? ›

The “big four banks” in the United States are JPMorgan Chase, Bank of America, Wells Fargo, and Citibank. These banks are not only the largest in the United States, but also rank among the top banks worldwide by market capitalization, with JPMorgan Chase being the most valuable bank in the world.

What are the 5 C's of credit? ›

The five Cs of credit are important because lenders use these factors to determine whether to approve you for a financial product. Lenders also use these five Cs—character, capacity, capital, collateral, and conditions—to set your loan rates and loan terms.

Is credit real money? ›

Key Takeaways. Credit money is the creation of monetary value through the establishment of future claims, obligations, or debts. These claims or debts can be transferred to other parties in exchange for the value embodied in these claims.

What's debit? ›

Debit is a formal bookkeeping and accounting term that comes from the Latin word debere, which means "to owe". A debit is an expense, or money paid out from an account, that results in the increase of an asset or a decrease in a liability or owners equity.

What is the best bank for low income people? ›

Both Wells Fargo and Bank of America can be good choices for low-income earners since the direct deposit minimums are not overly burdensome.

Can the government take your money from a credit union? ›

Through right of offset, the government allows banks and credit unions to access the savings of their account holders under certain circ*mstances. This is allowed when the consumer misses a debt payment owed to that same financial institution.

What's the best credit union to join? ›

Here are some of the country's top credit unions:
  • Alliant Credit Union. Alliant offers an above-average interest rate for savings. ...
  • Consumers Credit Union. ...
  • Navy Federal Credit Union. ...
  • Connexus Credit Union. ...
  • First Tech Federal Credit Union.

What is a predatory financial service? ›

What is predatory lending? Lending and mortgage origination practices become "predatory" when the borrower is led into a transaction that is not what they expected. Predatory lending practices may involve lenders, mortgage brokers, real estate brokers, attorneys, and home improvement contractors.

How to make money from banks? ›

  1. Switch to a high-interest savings account.
  2. Consider a rewards checking account.
  3. Consider certificates of deposit.
  4. Build a CD ladder.
  5. Take advantage of bank bonuses.
  6. Try a money market account.
  7. Check with your local credit union.
  8. Consider buying government bonds.
Apr 2, 2024

Can banks create money? ›

In most modern economies, money is created by both central banks and commercial banks. Money issued by central banks is termed reserve deposits and is only available for use by central bank account holders, which are generally large commercial banks and foreign central banks.

What are the 3 main financial institutions in the US? ›

There are three major types of depository institutions in the United States. They are commercial banks, thrifts (which include savings and loan associations and savings banks) and credit unions.

What are the most common and safest financial institutions? ›

Summary: Safest Banks In The U.S. Of April 2024
BankForbes Advisor RatingProducts
Chase Bank5.0Checking, Savings, CDs
Bank of America4.2Checking, Savings, CDs
Wells Fargo Bank4.0Savings, checking, money market accounts, CDs
Citi®4.0Checking, savings, CDs
1 more row
Jan 29, 2024

What are the 5 financial institutions? ›

Types of financial institutions include:
  • Banks.
  • Credit unions.
  • Community development financial institutions.
  • Utilities.
  • Government lenders.
  • Specialized lenders.

Which is the top No 1 bank in the world? ›

JPMorgan Chase

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