Banks and financial institutions may sound the same, but they’re two different entities that work in different ways. They can be classified as banking financial institutions, or ‘banks’ and nonbanking financial institutions. These are called financial institutions.
On a top level, banks are commercial entities whose role is to accept deposits and give loans. But financial institutions like investment banks, insurance companies, and financial firms are more inclined to offer various services schemes and plans to their customers.
Banks are banking financial institutions that function as middlemen. They connect depositors to lenders. A bank’s basic workflow is to accept deposited funds, and then lend these funds to customers who need it. A bank’s customers are generally people who want loans for various reasons. This can range from investment, education, or personal purchases.
Banks have another function to perform. They act as a payment agent. They offer payment services like debit cards, credit cards, cheques, cash deposits facility, and draft facility and more. People deposit money in banks for three primary benefits—safety, income through interest, and convenience.
The deposit is the money that the bank uses to generate revenue. The volume of these deposits decides the capacity of the bank to lend funds. Alternatively, a bank invests these deposits in assets or financial securities too.
Financial institutions are non-banking institutions. These include investment banks and companies and firms that are into leasing, insurance, investment and financial services and schemes. They work across a more wide range of financial sectors like
Service to corporates: Underwriting debt, share conflicts, security trading, business investments, company advisory services and derivative transactions as well.
Protection schemes: Insurance companies offer schemes and service against potential losses.
Investment and Pension: Mutual Funds and Pension schemes provide retirement plans and long-term saving returns. Investors are allowed to invest in these funds and then receive an interest income on returns.
Leasing: Leasing companies make huge capital available for large investments. This includes real estate purchases and costly equipment purchases.
To Summarize The Differences
● Banks are middlemen between depositors and lenders. Financial institutions are more service providers than actual banks
● Banks generate revenue by the interest they earn on the loans they lend. Financial institutions generate revenue through a more complex procedure. This includes fees, commissions, premiums, and installments.
● Banks can accept deposits, non-banking financial institutions cannot. So, they create other schemes and services.
● Banks are a safer place to deposit funds and savings. Non-financial institutions are for income, retirement, and investment.
The difference between banks and financial institutions is something that not a lot of people are aware of. But this is important since if you’re looking to save or invest money, that’s something that you should be aware of. If you’re someone that is looking to either save your money or try and invest it such that you’re ready for an early retirement, then you’ll need to know the differences between the two. It can make a world of difference.