Difference between a Bank and a Financial institution

Banking financial institutions

Banks, more precisely retail or commercial banks, fall under the category of banking financial institutions. A bank is a financial intermediary with a purpose to act as a middleman between suppliers of funds or depositors and borrowers. The main task of a bank is to accept deposits and use these funds later on to offer loans to its customers. Another duty of a bank is to act as a payment agent, which is done by offering a host of payment services, such as credit and debit cards, direct deposit facilities, cheques and bank drafts. A bank makes money by investing the deposits in financial securities and assets, but mostly by lending the funds further to its customers. The primary reasons for depositing money in banks are convenience, safety and interest income.

Bank falls under one category of financial institutions known as banking financial institutions. A bank is known as financial intermediaries that act as middlemen between depositors or suppliers of funds and lenders who are the users of funds. The main tasks of a banking financial institution are to accept deposits and then to use those funds to offer loans to its customers, who will in turn utilize them to fund purchases, education, to expand business, to invest in development, etc. A bank also acts as a payment agent by offering a host of payment services including debit cards, credit cards, cheque facility, direct deposit facilities, bank drafts, etc. The primary purposes in depositing funds in banks are convenience, interest income, and safety. A bank’s ability to lend out funds is determined by the amount of excess reserves and the ratio of cash reserves held by the bank. It is relatively easy for a bank to raise funds as certain accounts such as demand deposits pay no interest to the account holder (this means that no cost is incurred by the bank in attracting deposits for demand deposit accounts). A bank makes money investing the money that they receive from deposits, sometimes in assets and financial securities, but mostly in loans.

Investment banks, leasing companies, insurance companies, investment funds, finance firms, etc. A non-banking financial institution offers a range of financial services. Investment banks offer services to corporations which include underwriting of debt and share issues, securities trading, investment, corporate advisory services, derivate transactions, Financial institutions such as insurance companies offer protection against specific losses for which an insurance premium is paid. Pension and mutual funds act as savings institutions in which investors are able to invest their funds in collective investment vehicles, and receive interest income in return. Market makers or financial institutions that act as brokers and dealers facilitate the transactions in financial assets such as derivative, currencies, equity, etc. Other financial service providers such as leasing companies facilitate the purchase of equipment, real estate financing companies make capital available for real estate purchases and financial advisors and consultants offer advice for a fee.

Non-banking financial institutions

The other type of financial institutions includes investment banks, insurance companies, investment funds and other. A range of financial services offered by non-banking financial institutions differ from those of a bank. The main difference between both is that non-banking financial institutions cannot accept deposits into savings and demand deposit accounts, while it is one of the core businesses for banking financial institutions.

Meanwhile, they offer a variety of other services. For example, investment banks offer services to their clients such as underwriting of debt and share issues, corporate advisory, securities trading and derivative transactions and other investment services. Insurance companies offer a protection against specific losses in exchange for an insurance premium. Pension and mutual funds are savings institutions where investors are able to invest their funds in collective investment vehicles. There are financial services that are provided by both banking and non-banking financial institutions, such as granting loans, financial consultancy, leasing of equipment and investment in financial securities.

Bank vs Financial Institution

• A bank is known as financial intermediaries that act as middlemen between depositors or suppliers of funds and lenders who are the users of funds.
• Financial institutions can be divided into two types: banking financial institutions and non-banking financial institutions.
• The main tasks of a banking financial institution are to accept deposits and then to use those funds to offer loans to its customers.
• The main difference between the two types of financial institutions is that banking financial institutions can accept deposit into various savings and demand deposit accounts, which cannot be done by a non-banking financial institution.
• There are also a number of non-banking financial institutions which include investment banks, leasing companies, insurance companies, investment funds, finance firms, etc. A non-banking financial institution offers a range of financial services.
• The primary purposes in depositing funds in banks are convenience, interest income, and safety. Whereas the primary purpose in investing funds in non-banking financial institutions is to gain additional income.