Difference Between Bank and Financial Institution

Bank vs Financial Institution
 

Financial institutions can be divided into two types: banking financial institutions and non-banking financial institutions. Banking financial institutions include commercial banks whose primary role is to accept deposits and make loans. Non-banking financial institutions include investment banks,insurance companies, finance firms, leasing companies, etc. The following article takes a closer look at both types of financial institutions and explains the similarities and differences between banks and financial institutions.

What is a Bank?

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.

What is a 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. 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.

What is the difference between Bank and  Financial Institution?

There are a number of large differences between banking financial institutions and non-banking financial institutions in an economy. The main difference is that a banking financial institution can accept deposit into various savings and demand deposit accounts, which cannot be done by a non-banking financial institution. A non-banking financial institution provides a variety of services including some that overlap with banking financial institutions such as grant loans, offer financial advice, investment in financial securities, leasing of equipment, etc. In addition, non-banking financial institutions also offer additional services such as insurance coverage, underwriting activities, market making, etc. 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.

Summary:

Bank vs  Financial Institution

• Financial institutions can be divided into two types: banking financial institutions and non-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.

• 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 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.

• 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.

 

Further Reading:

  1. Difference Between Bank and Banking
  2. Difference Between NBFC and Bank
  3. Difference Between Bank and Post Office
  4. Difference Between Bank and Building Society