6 Types of Major Financial Institutions in North America

With a wide range of financial institutions (FIs) available to businesses, it can be overwhelming to know which FI to choose to manage your business finances.

Determining the right banking partner can have a significant impact on your business's success, and there is no one-size-fits-all solution when it comes to financial institutions. Businesses must consider various factors such as the level of service, account fees, transaction processing times, and interest rates, to name a few.

In North America, there is a diverse range of financial institutions, from traditional banks to credit unions, savings banks, government-backed banks, and more. Research by Plaid indicates that there are a staggering 11,652 FDIC and NCUA-insured financial institutions in the United States alone. Additionally, Canada has another 357 federally regulated financial institutions, as highlighted in a report by OSFI.

Each FI has its own set of unique features, advantages, and potential disadvantages. In this article we provide an overview of these different types of financial institutions and help business leaders make informed decisions about which banking partner will best serve their needs.

1. Retail and commercial banks

Banks are perhaps the most recognized and familiar financial institutions.

They offer several services, including checking and savings accounts, loans, credit cards, and investment services. Banks are federally regulated, which ensures that they operate in a safe and sound manner. And most banks protect customer deposits through government-backed FDIC insurance in the United States or CDIC insurance in Canada.

Unlike central banks (which do not work directly with the public), retail and commercial banks primarily offer traditional banking services. Retail and commercial banks also offer digital banking services that allow you to manage your accounts online.

Generally, banks tend to charge higher fees than other types of financial institutions due to their overhead costs associated with physical branches and staff members. Additionally, there are often strict and specific requirements that must be met for businesses to attain certain services from banks such as loans or lines of credit.

2. Credit unions

Another popular option among business owners when it comes to banking choices is credit unions.

Credit unions typically have lower fees than banks since they do not need physical buildings or staffing levels nearly as much as larger scale banking operations require.

Credit unions also focus on niche industries, local geographies, and are committed to community growth. However, one potential downside is that credit unions typically require customers to become members by paying a nominal fee and meeting eligibility requirements to use products and services.

3. Investment companies

If you're an established business looking to expand your investment portfolio, an investment company may be the right fit for you.

Investment companies are not exactly viewed as traditional banking options, however while they don't offer the same services as other financial institutions such as checking accounts or convenient debit card access, they can potentially provide great opportunities for those looking for investment advice or who are seeking growth capital through equity investments from external sources.

Investment companies work best for businesses who have already established themselves financially but are looking for ways to expand their wealth portfolio even further by investing in stocks, bonds, mutual funds, or structured investments like ETFs (exchange-traded funds).

4. Savings banks

Savings banks are financial institutions that offer a range of services, including checking and savings accounts, loans, and investment programs.

For business owners, savings banks can be an attractive choice because of their focus on building relationships and providing personalized service to clients. They are often small or mid-size institutions that can provide more flexibility than larger banks.

A potential downside of savings banks, however, is that they may have more limited resources and fewer technological capabilities than larger banks, which could make certain transactions or processes more challenging.

5. Internet or online banks

Are you a big proponent of digital services and online banking? Without the use of physical branches and locations, internet banks or online banks are financial institutions that operate entirely online.

For business owners, internet banks can offer advantages such as lower fees, higher interest rates on savings and checking accounts, and convenient online services.

Online banks typically provide 24/7 account access and mobile banking apps, making it easy for business owners to manage their finances on the go. However, a potential downside of internet banks is that they can lack the personal touch and face-to-face interaction that some business owners may prefer. Additionally, online banks may not offer as extensive a range of banking services as traditional brick-and-mortar banks, such as small business loans.

6. Government-backed banks

Government-backed banks in North America are financial institutions that are owned by the government or partially owned with government support.

For business owners, government-backed banks can be an attractive choice because they may often offer loans at lower interest rates than private banks. Additionally, government-backed banks may provide more flexible repayment terms, have a greater tolerance for risk, and offer advisory services. For example, the Business Development Bank of Canada (BDC) has consultants who can help clients in areas such as business strategy, operational efficiency, sales and marketing, and more.

However, government-backed banks can sometimes be subject to political influence or constraints, which may lead to changes in lending policies or practices.

The bottom line

Ultimately all businesses will require some kind of banking partner - either big bank or small - to meet their needs and efficiently manage their finances. It's important that business owners consider all factors to make an informed and strategic decision in selecting a business banking partner.

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Blake FriisContent Developer, Quadient Accounts Payable