Economics influence every aspect of daily life, from powering your home to providing the parts for your car or truck so you can get to work. The driving forces behind that economy are the major financial institutions, whether local, national, or international. These institutions provide the stability around which the economy revolves. Without that security, the stability of the economy would be threatened, even in your own community.
That's why security should be one of the first things on your mind when deciding what kind of primary financial institution you want to work with. Every bank and credit union has their own unique business model, and these business models in turn influence their security measures. As you think about choosing a primary financial institution, you need to consider how secure that institution is and have at least some knowledge of their policies and guidelines.
Before selecting a bank or credit union to be your primary financial institution (sometimes abbreviated as PFI), it helps to have an in-depth understanding of what financial institutions are and the services their business models provide. The basic services include:
Depositing and withdrawing money
Credit card services
Selling financial product
Developing and increasing saving
Regardless of the business model each financial institution uses, they are important because they act as intermediaries between the public and broader state and national financial markets. They help improve financial literacy in their communities, regulate trade, and create jobs. Understanding the different types of institutions and the security they use is vital before making your choice.
Types of financial institutions
You wouldn't try to deposit your family's emergency fund at an investment company, and you wouldn't choose a commercial bank to use as your private bank account. Every type of financial institution may fill a customer's needs differently, so it’s helpful to understand what various financial entities do to serve their account holders. Here are a few different types:
Central banks, such as the U.S. Federal Reserve, are high-level fiscal institutions that monitor and oversee the monetary policy of the nation. All the other banks in the United States fall under the umbrella of the Federal Reserve, the central bank.
Retail banks offer checking and savings accounts, loans, credit, and other financial services to the public. When they perform this function only for businesses, they are referred to as a commercial bank. Bank deposits are insured by the Federal Deposit Insurance Corp (FDIC).
Commercial banks offer the same services as retail banks, but tailor their services to businesses. Most large banks operate as both retail and commercial banks
Credit unions are financial institutions that operate similar to banks, except that they offer credit and loan services to particular cooperatives or demographics. Unlike banks, credit unions are nonprofit entities, meaning they don’t pay taxes. The same people who take part in their offerings also run the credit union. If you're dealing with a credit union, your deposits are insured by the National Credit Union Administration (NCUA).
Community development financial institutions (CDFI) focus on financial community development in less advantaged communities
Savings and loan associations pool publicly collected savings to lend out to individuals for housing.
Insurance companies help individuals and businesses protect themselves from the financial risks of property loss, or at the very least mitigate such risks, and may also provide some of the same financial services as a bank, such as loans
Brokerages specialize in securities trading, including exchange-traded funds (ETFs) and stocks — transactions that are regulated, but not guaranteed, like with banks and credit unions.
Investment companies issue securities to individuals and organizations looking to raise capital. That means they exist to provide more investment opportunities to more people.
Mortgage companies provide home loan financing to prospective homeowners, but also manage business real estate. Most mortgage companies work with other lenders who provide the capital for these property loans.
How a financial institution is governed and protected
Regarding security and consumer protections, various laws and regulations protect consumer assets and data when dealing with financial institutions. Account holders should have an understanding of the responsibilities and risks inherent in each institution and the various initiatives that have been taken to mitigate them. The United States has several entities that support financial institutions, such as:
FDIC insurance: Backing by the Federal Deposit Insurance Corp., meaning that if the bank where money is deposited should fail, your money is guaranteed for up to $250,000. The FDIC was created to provide an answer for the series of bank failures that shook public confidence in the banking institution during the Great Depression.
RFPA: Contrary to popular belief, the U.S. Supreme Court has ruled that consumers don't have a legal right to privacy when dealing with financial institutions. However, Congress passed the Right to Financial Privacy Act (RFPA) to implement a series of procedures the government has to follow before gaining access to someone's financial data, including sending them a notice of intent and providing means to challenge the disclosure.
CUNA: The Credit Union National Association (CUNA) is a national organization that advocates on behalf of credit unions. CUNA provides several resources for credit unions to employ in their negotiations with regulatory agencies, as well as consumer education about credit unions and their benefits.
CFPB: The Consumer Financial Protection Bureau (CFPB) is responsible for implementing and enforcing the consumer protection laws that protect you from predatory lending, fraud, and identity theft. In addition, each state in the U.S. has their own consumer protection laws that protect consumers in their respective state.
Although it might look complicated, think of each financial institution as its own industry. Each industry exists in its own legal and regulatory climate.
What to look for in a financial institution’s security
Awareness of a financial institution's security procedures is important when choosing a primary financial institution — your main bank or credit union, in other words. Some of the important facts you might want to know can be answered by asking the right questions about the financial institution’s business practices:
How does the institution store your personal information?
What is its reputation within the broader financial market?
Does it have a history of data breaches?
Does the institution offer multi-signature accounts?
How many complaints have been filed against the institution?
Does the institution offer services such as money transfer, e-banking, and mobile banking?
Mortgage lenders are regulated by the Fair Housing Act (FHA) and Equal Credit Opportunity Act (ECOA). The interest rate you receive from lines of credit are determined by the U.S. Federal Reserve and periodically re-evaluated. If you apply for a line of credit, that interest rate is determined and periodically reevaluated by the U.S. Federal Reserve. All financial institutions have such models or systems in place to safeguard your assets and investments.
A good way to learn more about the financial institution is to read their annual report. Annual reports contain details about the financial health of the institution, including the amount of capital they have, how they are doing in meeting their goals, and how they handle their clients' banking needs.
Finding the right primary financial institution
Although choosing a PFI is a matter of priorities, security should be at the top of the list. You have your own "business model" as a consumer, and you need to find a financial institution whose model both protects your assets and furthers your goals. That means taking into account:
Insurance and security practices — How will they keep you protected?
Reputation — What are they known for?
Regulatory environment — What federal agencies and laws shape their business?
Products and services — Do their offerings actually help you?
There's a lot more at stake than profitability. Without the security of your assets, profitability can be rendered meaningless. As you look for a primary financial institution to do business with, always look beneath the surface and ask the right questions to make sure your money is in good hands.
Discover more about Sustainable Banking in our previous blog post, "Economic impacts of a strong local economy."