All Banks Are Not Created Equal
Take a look around the area where you live sometime and notice the difference in the financial institutions. There are probably quite a few, ranging in size from something as large as the Bank of America to a small, local bank. When you look a little closer, you'll even find some places other than banks that will handle your money for you. In addition to the options available in your neighborhood, a whole new world of banking is unfolding before us in the form of Internet banks.
The U.S. banking system is federally operated, but it has 50 state jurisdictions, each with its own regulatory and operating pro-cedures.
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The name of a bank can help you figure out whether it's state-regulated or federally regulated. If it's federally regulated, its name will include “National” or “N.A.”
Credit union membership has extended far beyond people who work for a particular business or industry. There are credit unions organized by ethnicity, such as the Polish-American Credit Union, and even by family name. There are seven Lee Credit Unions, supported by the approximately 100,000 people in the United States with the last name Lee.
Traditionally, there are three types of financial institutions: banks, credit unions, and thrifts. Commercial banks handle about three quarters of the total amount of assets within the entire financial system, but many people prefer thrifts or credit unions. Let's take a look at each type of institution and some of the differences between them.
- Commercial Banks. Sometimes called full-service banks, these are the most widely used financial institutions in the United States, with about 8,000 operating. Commercial banks are permitted to take deposits, loan money, and provide other banking services. They can have either a federal or state charter and are regulated accordingly. Commercial banks vary greatly. They can be huge mega-banks that have sprung up during the past several years or small, community banks. The 300 or so foreign banks that operate in the United States are technically commercial banks. They must comply with federal regulations, but many of them do not offer the banking services that the average customer requires.
- Credit Unions. These offer many of the same services as commercial banks: checking accounts, savings accounts, vacation clubs, ATM services, and calendars at the holidays. They generally can offer better rates on loans and savings, however, because, as nonprofit organizations, they don't pay federal taxes. It used to be that only people with common occupation, association, or geographical area could form and join credit unions. These days, however, practically everyone can join a credit union in one capacity or another. Before joining a credit union, make sure it's a member of the FDIC, which guarantees deposits. Not all credit unions are FDIC members.
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Thrifts are the collective name for savings banks and savings and loan associations. They generally accept deposits from, and extend credit primarily to individuals.
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Traditional banks are known as brick and mortar banks. Traditional banks that offer online banking are being called brick-to-click banks, and, Internet-only banks are called virtual banks or e-banks.
- Thrifts. These are the financial institutions commonly known as savings and loans (S&Ls). Savings and loans have had a tarnished reputation since the late 1980s, when many of them failed and had to be bailed out by Uncle Sam (that is, taxpayer dollars). Recent legislative changes have greatly improved the quality of thrifts, making them good options for depositors once again. Make sure your deposits are insured by the State Life Insurance Corporation (SLIC).
- Internet Banks and Online Banking. Many banks today offer online banking, allowing you to access your accounts online to check balances and transactions, pay bills online, and transfer money from one account to another. You may be able to access stock quotes and trade stocks and mutual funds. In addition to online banking offered by traditional banks, there's a new guy on the block—Internet banks, also called virtual banks or e-banks. They offer most of the same services as traditional banks and are subject to the same federal regulations. They're convenient, open all the time, and, because they have a much lower overhead than traditional banks, they can offer some big financial advantages to customers in the form of higher interest rates and lower fees.
A disadvantage of virtual banks is that they have no ATM machines of their own, meaning you end up paying service charges to conduct ATM transactions at all ATMs. Also, many e-banks won't let you deposit money to your account via an ATM, meaning you have to mail a check or transfer money online from another account. Internet banks are aware of this problem, however, and are taking steps to resolve it. Some virtual banks allow you to drop off deposits at Mail Boxes Etc., and others are working out deals with regional ATM networks to allow their customers to use those machines for deposits.
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Some of the most well-known virtual banks include Juniper Bank (www.juniper. com), National Interbank (www.nationalinterbank. com), First Internet Bank of Indi-ana (firstib.com), and NetBank (www.netbank.com).
It used to be that most of the profits financial institutions realized came from the spread between the interest they'd pay on deposits and the interest they charged on loans. But now more than 50 percent of the average bank's earnings comes from fees.
No matter how you decide to conduct your banking, interest rates probably will be a factor in deciding what financial institution you choose. These days, interest rates are pretty much low across the board. Still, you should look around and see where you can get the most interest on your money. Even a fraction of a percentage point adds up. And, as you get more money, it makes even more of a difference.
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Excerpted from The Complete Idiot's Guide to Personal Finance in your 20s and 30s © 2005 by Susan Shelly and Sarah Young Fisher. All rights reserved including the right of reproduction in whole or in part in any form. Used by arrangement with Alpha Books, a member of Penguin Group (USA) Inc.
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