Under the umbrella of banking and finance, the industry has commercial banks—which are consumer facing like Bank of America—as well as central banks—the government entities that regulate the industry and manage monetary policy.
What are Central Banks?
Central banks handle the money supply for a single country or series of countries. They control interest rates and the flow of currency. The independent institutions work to prevent inflation and strive to keep the unemployment rate low. In the U.S., the central bank is known as the Federal Reserve System or “the Fed.” It was established by Congress in 1913 in order to ensure the safety and soundness of the nation’s banking and finance system. The European Union has a similar organization, the European Central Bank, which oversees banking and finance for 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 general 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 like credits cards and loans. On the flip side, when an individual places money in a savings account, they are effectively lending money to the bank and can earn interest on their money.
How Do Central and Commercial Banks Engage With Each Other?
While the central banks oversee the industry, consumers most commonly engage with commercial banks, which offer products such as checking accounts, savings accounts and mortgages. Commercial banks generally offer services for individuals and businesses. Traditionally, commercial banks have lived in brick-and-mortar locations, but in recent years, digital banking has grown in prominence, giving consumers and businesses more banking and finance 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. It allows a customer to deposit and withdraw money as needed. Most people use this for everyday expenses like buying groceries, paying rent and going to the movies. Checking accounts do not have restrictions on how often customers can access money through debit card purchases, withdrawals or transfers. Fees on checking accounts vary by bank. Some charge monthly maintenance but will waive the fee if customers maintain a certain balance or set up direct deposit. Overdraft fees also affect customers. When customers spend more than they have in their account, they can be charged an additional fee. The median overdraft fee at large banks is around $35.
What is a Savings Account?
Savings accounts function as a rainy-day fund where customers can save their money and earn interest. Unlike a checking account, a savings account prepares customers for longer-term needs instead of being accessed day to day. Savings accounts are federally insured, which means that up to $250,000 in an account would be covered if the bank failed. Federal law also restricts transfers and withdrawals from savings accounts to six a month. Making more withdrawals typically result in a fee. The restrictions can help customers keep the money safely stored for emergency situations and the withdrawal limit helps deter patrons from accessing their funds too often so the money within the account can mature.
About Credit Cards Loans
Unlike a traditional loan, credit cards allow consumers to borrow against a credit limit and pay back only what they use. Many types of banks offer credit cards with different interest rates and special offers. Banks such as Chase and Bank of America offer credit cards that allow customers to receive cash back and earn miles towards travel. There are also specialty credit cards available that are unique to your specific interests. Are you a student? Do you commute? There are credit cards that can provide specific kinds of rewards such as gas rewards or student credit cards to help college students build their credit from scratch. Credit cards come with their fair share of fees. Like a traditional loan, interest will xaccrue if the balance is not paid off within the grace period. They may also carry transaction fees, if you’re out of the country, or annual fees, depending on the issuer.
About Business Loans
Business loans cover a range of needs for businesses of all sizes. There isn’t a single type of business loan. Instead, business owners in need of a cash influx can consider everything from term loans to business lines of credit. With a term loan, businesses receive a lump sum of cash up front, which the business then repays with interest over a predetermined period—just like most traditional loans. Term loans can require business owners to put down collateral, such as real estate or other high-value items that the lender could sell in the event of a default. Term loans are great for businesses looking to expand and need capital to get going. Business lines of credit offer more flexibility than a term loan, allowing a business to access funds up to a set credit limit, where the business pays interest only on the money that is withdrawn as opposed to interest on a lump sum. Small businesses may also consider SBA loans, which the Small Business Administration guarantees. These loans have some of the lowest interest rates, longest repayment terms and highest borrowing amounts, some of which can be up to $5 million. That said, the application process is rigorous and SBA loans can be difficult to qualify for.
About Mortgage Loans
Mortgage loans, more commonly known as home loans, allow people to purchase property. When a customer takes out a mortgage, they make regular monthly payments over the course of a designated timeline to repay the loan. The monthly payment generally covers the principal balance and interest. The principal balance is the amount of the original loan minus what you’ve paid already. Interest is the amount a customer pays to a bank in exchange for borrowing the money. Occasionally, customers will take out a second mortgage. A second mortgage is a loan taken out against a home that already has a mortgage on it and the funds are often used to cover other purchases or financial obligations.
Financial Planning in Commercial Banks
Many types of banks offer financial planning. Consumers may be most familiar with financial advisors, who can help individuals diversify their investments and take a holistic look at their financial health. A financial advisor can work with customers to identify long-term goals and create an investment strategy to help them get from A to B. In the digital age, there are so-called robo-advisors as well as human financial advisors for consumers to choose from. Robo-advisors use computer algorithms to guide investment decisions based on personal preferences. This can be a good solution for someone just getting started in investing and financial planning. A human financial advisor can provide a more in-depth customized financial plan. It can allow a customer to delegate many of the inherent duties in managing personal finances. Financial advisors work with a customer to created personalized plans for retirement, stock and bond investments and even insurance coverage.
How Envestnet | Yodlee Works With Different Types of Banks and Services
Envestnet | Yodlee offers an innovative range of banking tools including data aggregation, cash flow analysis and transaction data enrichment. Our apps help banks and customers optimize financial wellness with actionable and intelligent applications. Our FastLink application enables consumers to securely link accounts, including checking, savings, credit cards, investments, mortgages and others from institutions around the world to get a complete look at their finances. Whether on a desktop, tablet or mobile device, FastLink makes it easy for consumers to view and manage their finances in one place. With the Envestnet | Yodlee Expense and Income Analysis FinApp, spending and income come to life through color-coded graphics to highlight trends and spending categories that empower consumers and small businesses to manage spending. Empowered with this data, consumers can use Envestnet® | Yodlee® Net Worth FinApp to move towards financial health. The Net Worth FinApp enables consumers and businesses to see the progress they’ve made toward financial wellness. Users can also see updates on the amount of change to investments, property, liabilities and more. A net worth app can allow a consumer or business to paint a full picture of their finances without risking mistakes that can occur when they manually piece the picture together.