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What Is a Bank?

Kailey Hagen
By: Kailey Hagen

Our Banking Expert

Many or all of the products here are from our partners that compensate us. It’s how we make money. But our editorial integrity ensures our experts’ opinions aren’t influenced by compensation. Terms may apply to offers listed on this page. APY = Annual Percentage Yield

What is a bank? Banks are businesses that help keep your savings safe and lend you money when you need it. You're probably already familiar with common banking products, like checking and savings accounts, but they have a lot more to offer. Below, we'll take a closer look at how banks operate and how to choose a bank that's right for you.

What is a bank?

A bank is a for-profit business with a license to hold deposits and lend money. Most offer a variety of banking services and accounts you can house your money in, including:

  • Checking accounts
  • Savings accounts
  • Certificates of deposit (CDs)
  • Money market accounts

Some also offer investment accounts or good old-fashioned safe deposit boxes. And if you need to transfer funds, they offer plenty of ways to do that, like electronic transfers, wire transfers, and checks. Many also do currency exchange.

On the borrowing side, most banks offer the following services:

  • Mortgages and mortgage refinancing
  • Auto loans
  • Personal loans
  • Credit cards

But again, services vary by bank. Some may have more or fewer loan options than this.

How does a bank work?

Banks are in the business of making loans. Banks make loans to credit-worthy borrowers, and then those loan customers pay back what they borrow plus interest. Charging interest and other fees is how banks earn profits for shareholders. Banks also pass some of this profit back to those with deposit accounts as a way to incentivize them to keep money there.

In order to operate, a bank must have a charter, which is essentially a license to operate. U.S. banks can be chartered on the national level or the state level. Nationally chartered banks are overseen by the U.S. Department of the Comptroller of Currency. This organization makes sure the banks operate within the laws. It also requires nationally chartered banks to maintain FDIC insurance. This protects your money up to $250,000 per person per bank in the event of bank failure.

State-chartered banks operate under the regulations of the state they have their charter through, and they're overseen by a state institution. These banks are typically smaller than nationally chartered banks and operate in a limited area.

Types of banks

There are many ways to break banks into types. We'll look at two of the most common methods below.

Types of banks by services

One way to categorize banks is to look at the services they offer to their customers. Here are some common types you might come across:

  • Retail banks: These banks offer personal bank accounts and loans directly to consumers. Most banks that you're familiar with fall into this category.
  • Commercial banks: These banks cater to businesses and offer a variety of business bank accounts and loans. Many popular banks have retail and commercial divisions.
  • Investment banks: Investment banks typically deal with corporate clientele and often assist with mergers and acquisitions.
  • Central banks: Central banks, like the U.S. Federal Reserve, don't deal directly with the people. They help maintain economic stability by setting appropriate economic policies, and these policies affect the services other banks offer to their customers. For example, the Federal Reserve sets the federal funds rate. This determines how much banks charge to borrow money from each other, and banks in turn use it to determine the interest rates they charge their customers on loans.

Types of banks by service area

Another way to compare banks is by looking at their service area. These are the main categories you'll find here:

  • National banks: National banks typically have nationwide branch and ATM networks and serve a wide variety of customers. They often have large budgets and strong online and mobile banking tools, and some have international banking divisions as well.
  • Regional banks: Regional banks typically operate in a smaller area -- perhaps just a few states. They may have a lot of branches and ATMs in their area, but you won't find any if you travel outside of it. For some people, these banks are a good compromise if they want a personal banking experience without restricting themselves to a local community bank.
  • Community banks: Community banks operate in a small area, usually within a single state. In some cases, it may only have a single branch. But what these banks lack in size, they make up for with excellent customer service.

RELATED: What Is a Regional Bank?

Online banks: Online banks don't have any branches, though most have nationwide ATM networks. They're becoming increasingly popular because they're open to just about anyone and they have lower fees and higher interest rates on savings accounts than the other bank types listed here. But depositing cash can be tricky with online banks.

Banks vs. credit unions

Credit unions are similar to banks in many ways. Both offer a variety of bank accounts for their customers to choose from and lend money to qualifying borrowers. But unlike banks, credit unions are nonprofit institutions. That means any money a credit union earns goes back to its members. As a result, credit unions can often offer more competitive rates and lower fees than some large, national banks.

But credit unions have their drawbacks as well. Most only operate in a small area and they have membership requirements that restrict who can join. Their online and mobile banking tools often aren't as good as those you'll find with large banks either. But they could still be a good fit for those who value customer service and don't travel often.

How to choose a bank

With so many options out there, finding the right bank for you can feel overwhelming. But there are a few questions you can ask yourself to make it easier, like:

  • What kinds of banking products am I interested in?
  • How do I plan to deposit and withdraw money?
  • Do I prefer to manage my finances on my own or with the help of a banker?
  • What are the bank's online and mobile banking tools like?
  • What's the bank's ATM network like?
  • How much do I plan to keep in the bank?

Your answers to these questions should help guide you toward the right bank for you. And keep in mind, you don't have to choose just one. For example, you could stick to a brick-and-mortar checking account for easy access to your cash but move everything else to an online bank that offers you a higher interest rate on your savings. It's all about what works best for you.


  • Yes, a bank is a for-profit business that makes money by charging interest and fees to loan customers. It keeps some of this for its shareholders and returns some to those with deposit accounts at the bank.

  • Banks use their capital levels to create loans (and in essence money since loans create money in the form of deposits). As long as a bank has adequate capital levels, and credit-worthy borrowers want loans, a bank will give loans to as many borrowers as possible.

  • There are many ways to categorize banks. You can break them down by size into national, regional, and community banks. Or look at the services they offer. Retail banks serve individual customers while commercial banks serve businesses. Many serve both types of customers. And then there are online banks that have no branches, and as a result, can afford to charge fewer fees and offer better interest rates than traditional banks.

Our Banking Expert