There are different types of banks to choose from. A bank is an important place to store your money, conduct transactions, and borrow money.
Learn about the different types of banks and how to pick an online bank with this thorough guide. As someone who achieved financial freedom in 2012, having an online bank to earn a higher interest rate for my liquidity is important.
However, it is harder than ever to pick an online bank with a good interest rate because interest rates are so low. Online-only banks without physical locations tend to have the highest rates due to lower overhead.
Let's look at the different types of banks.
The Different Types Of Banks
The Mega Banks (Retail Banks)
Mega banks are financial institutions that cater to everyday banking consumers. Mega banks typically are brick and mortar banks with physical locations. But given they are mega banks, they also have robust online bank operations as well. Some of the mega banks include Bank of America, Chase, and Citibank.
Unfortunately, mega banks tend to have the lowest interest rates. With so man branch locations costing money, mega banks can't pay as high of a rate. That said, mega banks offer convenience for everyday checking transactions (e.g., check deposits or withdrawing cash).
In the U.S., all retail banks are insured by the Federal Deposit Insurance Corporation (FDIC), which is an independent agency established by Congress to protect the public financial system. The FDIC provides up to $250,000 in insurance on your deposits per person.
The good thing about mega banks and retail banks is that they tend to offer lower borrowing rates if you want to take out a mortgage or get a small business loan. Given mega banks pay so little in savings interest rates, they in turn, can afford to lend at lower rates.
Pure online banks only have online operations. As a result, the savings rate for savings accounts tends to be higher. With lower overhead, online banks tend to pass on higher savings rates to you.
Using an online bank, you can handle most of your basic banking needs, including direct deposit, account transfers, and bill payment.
The main issue with online banks is convenience. It is relatively harder to deposit and withdraw funds from an online bank. However, given the pandemic and so many things are done via a mobile app nowadays, online banking is getting easier.
A credit union is a nonprofit organization that works to protect members and provide better service and rates. Credit union deposits up to $250,000 are protected by the National Credit Union Administration (NCUA).
Credit unions are also known as cooperative banks or community banks. Credit unions will have physical stores to deposit checks, withdraw funds, and meet with bankers face-to-face to conduct business. The members of a credit union own a portion of the credit union. It's like Trader Joes, where employees own a part of each store.
Credit unions aim to offer lower borrowing rates and provide higher savings rates than mega banks. Mega retail banks are generally publicly traded entities focused on making a profit. Credit unions are not.
Therefore, it's worth looking up your local credit union to see what they have to offer. The main issue with credit unions is that they are not nationwide or international. Therefore, your access to funds is limited.
A few of the most popular credit unions include Alliant, Connexus, and Consumers Credit Union.
How To Join A Credit Union
Not everyone can join a credit union. You must join through an invite or an affiliate employer, school, or church. Further, most credit unions charge a membership fee of between $5 to $25 to sign up. Additional fees may be applied when opening an account.
Investment banks like Goldman Sachs are starting to offer more retail banking services. Goldman Sachs, for example, started Marcus, a retail bank.
In general, I'm not a fan of banking with investment banks for your retail banking needs. Only if you are an ultra-high net worth individual who is a private client should you bank with an investment bank.
Of the different types of banks, banking with an investment bank is my least favorite route.
Robo-advisors like Personal Capital also are acting like banks. Sometimes, robo-advisors and online brokerages will offer higher rates than normal.
However, using a robo-advisor as a bank doesn't make sense. A robo-advisor should be used for investing purposes.
What Type Of Bank Is Best For You?
With so many different types of banks, it may be hard to choose the best bank for you.
You need to choose a bank or multiple banks that serve your banking needs and lifestyle. For example, I have two mega banks. Citibank for my personal bank, Chase for my business bank. When rates were higher, I also used CIT Bank to earn the highest savings rate possible.
The best savings interest rate is almost always from an online bank.
To get the best mortgage rate, I always check with a mega bank and with Credible, my favorite online lending marketplace. I was able to get a jumbo 7/1 ARM at 2.125% with no fees for my latest pandemic home purchase.
Be Careful About Banks That Charge Ongoing Fees
If you stick with on of the reputable different banks, you won't get charged an ongoing fee. However, some banks have random fees that nickel and dime you to death.
The worst are fees for ATM usage, checking fees, and savings fees. You can't bank with a bank that has these ongoing fees.
Check out what the overdraft fees are as well. Finally, there might be insufficient funds or minimum threshold of funds fees you might have to pay. Don't go with a bank with such fees!
Customer Service Is Important
Some banks, like First Republic Bank, pride itself on its customer service. When you're going through a difficult refinance, for example, you want to have great customer service to help you through the stressful process.
Having a personal banker handle your banking issues is also helpful. I recently wired $50,000 to a venture debt fund and had the funds returned because of insufficient funds. Apparently, the checks I deposited before the wire had not cleared yet!
I reached out to my private banker at Citibank to get the matter resolved.
Great Mobile Experience Is Important
Having a great mobile banking app is key. Nobody wants to go into a branch anymore to deposit checks when you can do everything on an app.
Many banks have raised their monthly caps on online deposits since the pandemic, making it easier than ever to avoid trips to a branch. Different types of banks also can have very different amount limits for withdrawal.
Different Types Of Banks For Different Needs
If you have a lot of money, it's good to use multiple banks. This way, you spread out your capital and lower your risk. The FDIC insures $250,000 per account per person. Therefore, if you have $1,000,000, you may want to open up four bank accounts if you are really risk averse.
Just remember to watch out for maintenance fees, inactivity fees, or carrying too low of a balance. The last thing you want is to overdraft an old bank account that you forgot about. This will hurt your credit score. And if you have over an 800 credit score like I do, you want to protect it to get the best borrowing rates possible.
When it comes to banking, it's important to research the different types of banks. Some will be more suitable than others.
When it comes to saving money, if the amount of money you saved each month doesn't hurt, you're not saving enough! Here's how much savings you should have by age to retire comfortably and free.
Good luck! Out of all the different types of banks, go with a mega bank and an online bank.