Bank at School - Lesson 10             Previous Lesson             Next Lesson
Types of Financial Institutions 

Introduction
Lesson 9 reviewed common services offered by financial institutions. However, there are other organizations which offer similar services. Lesson 10 looks at the differences between financial service organizations. 

Objective
To familiarize students with the variety of institutions.

To explain the similarities and the differences between those institutions.

Lesson Material
As we discussed in lesson 9, financial institutions may serve a wide range of clients. A very large financial institution might have a division which just does business (or commercial) lending. Other financial institutions may specialize in mortgages.

Let's take a look at the different types of financial institutions in the market place today: Commercial banks work with both individuals and businesses.

Commercial banks offer many products: savings and checking accounts, mortgage, business and student loans, and often provide investment advice to their clients. Certain banks specialize in business clients only. These banks are sometimes referred to as wholesale banks.

Savings and Loans (S&Ls) are financial institutions which specialize in mortgage or home loans. They generally will offer the same kinds of savings and checking accounts as a financial institution.

Credit Unions are not-for-profit financial cooperatives where all the members share a common affiliation. Perhaps they all work for the same company, go to the same church, or live in the same neighborhood. Unlike banks or savings and loans, credit unions are owned and operated by their members. Depending on the size of a credit union, they may offer their membership many of the services available at a bank or S&L such as checking accounts, mortgage loans, ATM cards or credit cards. Credit unions' primary function is to serve its members. As not-for-profit financial institutions, credit unions return all "profits" to their members in the form of dividends on savings, lower loan rates and reduced service fees.

Currency Exchanges differ from financial institutions, S&Ls and credit unions. The primary difference between a currency exchange and the other financial organizations is currency exchanges do not accept deposits or make loans.

Many people use currency exchanges to cash government checks or obtain money orders. A company or individual might request a debt be paid by money order if they are uncertain of a person's creditworthiness or the bill needs to be paid by mail.

Currency exchanges earn a profit by charging a fee for most of their services. Because the fees currency exchanges charge for financial services are generally much higher than comparable services at a bank, S&L, or credit union, they are a more expensive option. Currency exchanges are often located in areas where there are no other financial institutions. For people living in those neighborhoods, currency exchanges may provide their only access to financial services.

Suggested Activity
Use the yellow pages and look up the various institutions mentioned above (credit unions may or may not be listed). Notice how many institutions there are in your city.

Discuss reasons why financial institutions and credit unions may want to specialize in a specific area or market (example: commercial lending or mortgages). What advantages are there to the institution and the customer?

Suggested Homework
Fill out the financial institution comparison chart located in the printed manual.

Ask your parents which institutions they are familiar with and use. 

Glossary
Commercial Bank - Allows people to deposit money safely, with accounts backed by the FDIC. Banks loan money to individuals and businesses. Deposits earn interest and borrowers pay interest, with the financial institution or credit union making its profit on the "spread" between the interest it pays for deposits and receives from borrowers. Savers and borrowers are brought together in a financial institution or a credit union.

Credit Union - Money deposited is normally loaned to members. Membership usually consists of people in a given job, trade industry or other affinity group.

Currency Exchange - Cashes checks for a fee (generally a percentage of the check). Does not accept deposits or make loans. Customers can carry large amounts of cash on which they do not earn interest.

Mortgage - A loan secured by property, typically a home loan in which the lending institution holds title to the home until the loan is paid.

Savings and Loan Association - An institution which originated with homeowners pooling their money to make housing loans. An S&L accepts deposits and specializes mostly in home mortgages.

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