Under the umbrella of banking and finance, the industry includes both commercial banks – which are consumer banks like Bank of America – and central banks – the government agencies that regulate the industry and implement monetary policy.
What are central banks?
Central banks manage the money supply for a single country or a number of countries. They control the interest rate and the flow of money. The independent institutions work to prevent inflation and strive to keep unemployment low. In the United States, the central bank is known as the Federal Reserve System or "Fed." It was created by Congress in 1913 to ensure the safety and soundness of the country's banking and financial system. The European Union has a similar organization, the European Central Bank, which oversees the banking and finances of 19 countries.
What are commercial banks?
A commercial bank is a financial institution such as Bank of America or Chase that provides banking services to the public and businesses. Commercial banks offer products such as checking and savings accounts, credit cards and business loans. These financial institutions make money by charging interest on services such as credit cards and loans. On the other hand, when someone puts money in a savings account, he is essentially lending money to the bank and can earn interest on his money.
How do central and commercial banks interact?
While central banks oversee the sector, consumers most often work with commercial banks, which offer products such as checking accounts, savings accounts and mortgages. Commercial banks generally offer services to individuals and businesses. Traditionally, commercial banks have been based in physical locations, but in recent years digital banking has become increasingly important, giving consumers and businesses more banking and financing options than ever. Let's look at these products and services in more detail.
What is a checking account?
A checking account is the most common type of bank account. This allows a customer to deposit and withdraw funds as needed. Most people use this for everyday expenses like grocery shopping, paying rent, and going to the movies. Checking accounts have no restrictions on how often customers can access money through purchases, withdrawals, or debit card transfers. The costs for checking accounts vary from bank to bank. Some charge monthly maintenance, but waive the fee if customers maintain a certain balance or make a direct deposit. Overdraft fees also affect customers. When customers spend more than what is in their account, additional fees may be charged. The average overdraft fee at major banks is about $35.
What is a savings account?
Savings accounts act as a rainy day fund where customers can save their money and earn interest. Unlike a checking account, a savings account prepares customers for long-term needs, rather than being accessible on a daily basis. Savings accounts are federally insured, meaning up to $250,000 in an account would be covered if the bank were to fail. Federal law also limits transfers and withdrawals from savings accounts to six per month. There are usually costs involved for multiple withdrawals. The limits can help customers keep the money safe in emergencies, and the withdrawal limit helps discourage customers from accessing their funds too often to mature the money in the account.
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Unlike a traditional loan, credit cards allow consumers to borrow against a credit limit and only pay back what they have used. Many types of banks offer credit cards with different interest rates and special offers. Banks like Chase and Bank of America offer credit cards that allow customers to get cash back and earn miles for travel. There are also special credit cards available that are unique to your specific interests. Are you a student? Are you traveling? There are credit cards that can offer specific types of rewards, such as gas rewards or student credit cards, to help students build their credit from the ground up. Credit cards carry a fair share of costs. As with a traditional loan, interest accrues if the balance is not paid off within the repayment period. They may also charge a transaction fee if you are abroad, or annual fees depending on the issuer.
About business loans
Business loans meet a number of needs for businesses of all sizes. There is no one type of business loan. Instead, business owners in need of cash flow can consider everything from term loans to business lines of credit. With a term loan, companies receive a fixed amount of cash upfront, which the company then repays with interest over a predetermined period, just like most traditional loans. Term loans may require business owners to put up collateral, such as real estate or other valuables, that the lender could sell in the event of default. Term loans are good for businesses that want to expand and need capital to get started. Business lines of credit offer more flexibility than a term loan, allowing a business to access funds up to a set credit limit, with the business paying interest only on the funds withdrawn, rather than interest on a fixed amount. Small businesses can also consider SBA loans that are guaranteed by the Small Business Administration. These loans have some of the lowest interest rates, the longest repayment periods, and the highest loan amounts, with some reaching as high as $5 million. That said, the application process is rigorous and it can be difficult to qualify for SBA loans.
About mortgage loans
Mortgages, better known as home loans, enable people to purchase real estate. When a customer takes out a mortgage, he or she makes regular monthly payments within a specified timeline to repay the loan. The monthly payment usually covers the principal and interest. The principal is the amount of the original loan minus what you have already paid. Interest is the amount a customer pays to a bank in exchange for lending the money. Sometimes customers want to take out a new mortgage. A second mortgage is a loan that is taken out on a home that already has a mortgage. The money is often used to cover other purchases or financial obligations.
Financial planning in commercial banks
Many types of banks offer financial planning. Consumers are perhaps most familiar with financial advisors, who can help individuals diversify their investments and take a holistic view of their financial health. A financial advisor can work with clients to identify long-term goals and create an investment strategy that helps them get from A to B. In the digital age, there are both so-called robo-advisors and human financial advisors for consumers to choose from. by. Robo-advisors use computer algorithms to guide investment decisions based on personal preferences. This can be a good solution for someone who is just starting out with investing and financial planning. A human financial advisor can provide a more in-depth, customized financial plan. It can provide a client with the ability to delegate many of the tasks inherent in personal finance management. Financial advisors work with a client to create personal plans for retirement, stock and bond investments, and even insurance coverage.
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