Types of Banks.
Commercial banks differ from investment banks. Most financial consumers think of “the bank” as a place to keep liquid financial resources, such as checking accounts and savings accounts. A consumer may have personal accounts at a commercial bank. The commercial bank’s primary business involves taking in financial assets as deposits then lending these assets to other customers at a rate of interest. The interest rate the bank charges on loans and revolving lines of credit or other credit facilities will depend on the current interest rate environment.
A consumer bank, such as a credit union or savings bank, may focus on the personal banking needs of a specific group or industry.
An investment bank raises capital for businesses. The investment bank works with businesses to sell loans offered by the company called bonds. Bonds are debts owed by the company to investors. The investment bank distributes the bond issue to customers. The investment bank may choose to distribute publicly traded bonds to clients, or arrange a private placement of the client company’s debt directly with another company. The investment bank prices the debt according to the current yield curve and the company’s credit rating. A company's credit rating, like a consumer's FICA credit score, helps the company pay less to sell bonds in the public or private markets.
Investment banks also raise capital for client companies by arranging equity issues, called stock. Investment banks receive fees from clients to raise capital. Many investment banks employ professional sales and marketing teams to distribute clients’ debt and equity issues.
As a capital market banking institution, investment banks also help clients to restructure debt loans. In some instances, the bank creates new structured financial products or collateralizes debt with other financial assets. Investment banks may also utilize derivative instruments—stand-in, synthetic investment products—to assist clients’ achievement of financial goals.
Financial services provided by banks. Consumers use banks to keep financial resources safe and readily available for use. Deposits made by customers of the bank are insured by the Federal Deposit Insurance Corporation (FDIC). Customers of the bank rely upon its ability to liquidate financial resources held on account when they request the bank to do so. Banks provide customers with specially printed checkbooks. Customers pay creditors and other financial obligations by writing a check on the bank account. The bank pays the check written by its customer. Overdrafts and other fees are charged in accordance with the bank’s customer policy. If a customer withdraws more money than he has in account with the bank, the bank charges the customer a fee. Customers may arrange for overdraft protection with the bank. Overdraft protection is a loan that is accessed when the customer’s available fund balance is negative.
Banks lend money to private and business customers. These loans take the form of personal loans, commercial/business loans, and home/property loans (mortgages).
Banks also issue credit cards to customers. A credit card is a form of demand loan available to the customer. The bank also supports its credit card business by processing payments to settle customer credit card bills. To support merchants accepting customers’ credit cards, banks may offer a merchant network service. Merchant network services include card terminals or credit card machines.
Banks provide debit cards to their customers. Sometimes called check cards, debit cards provide ready access for customer use without the need to make a physical check or cash withdrawal. Customers may use debit or credit cards in the bank’s automatic teller machine (ATM).
Banks facilitate fund transfers for customers via wire transfer and electronic transfer of funds. Banks utilize an interbank network to transfer funds for clients. Banks also provide certified or cashiers’ checks for customers. The bank guarantees the check so that the customer may offer it as certified available funds to a payee. In order to create a certified check, the bank usually withdraws client funds.
Banks offer the services of a notary public to validate clients’ important documents.
Private banks. The financial needs of high net worth individuals, families, and their businesses differ from those of most consumers. Private bank clients must usually present a certain minimum net worth to obtain private banking services. Private bank services include tax and estate planning, tax planning, and philanthropic gift planning.