11 Types of Banks You Should Know About and Their Purposes
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Key Takeaways:
Banks are licensed financial institutions that accept deposits from individuals and businesses, issue loans, and offer financial products like savings accounts.
There are many types of banks, ranging from retail banks serving individuals to investment banks facilitating complex business transactions. Knowing the different types of banking institutions helps you choose which one best suits your needs.
In the U.K., Germany, and Switzerland, banks are regulated by various government authorities.
One incorrect character in an IBAN can result in delays, rejected transfers, or even the loss of funds. For businesses and individuals sending money across borders, understanding the meaning of IBAN, its structure, and functions is essential. This guide explains how the system works, how to find your IBAN number and use it correctly to ensure your payments arrive safely and on time.
What is banking, and how does it work?
Banking is the business of accepting deposits from customers, then lending these deposits to generate interest for the bank and its customers. Accepting these deposits and lending them to other individuals and businesses is done under a strict regulatory framework to safeguard customers’ money. Deposits are also insured to a large extent by a government body.The modern economy relies heavily on banks to process commercial transactions, especially large ones. No one wants to carry wads of cash around, so we rely on banks to process transactions conveniently. Let’s explore some bank categories below.
Central banks
You’ve likely heard of central banks. They aren’t “banks” as we know them. Rather, a central bank is a government institution that manages a country’s currency and monetary authority. It’s the underlying bank that drives the strategy of the commercial banks we interact with.A country’s central bank supervises commercial banks operating in its jurisdiction. The central bank also acts as a lender of last resort to commercial banks facing temporary financial difficulties. A central bank helps commercial banks function uninterrupted, giving citizens assurance to conduct business transactions and keep economic activities flowing smoothly.
Retail banks
Retail banks render services to everyday individuals. They are the ones where individuals deposit money and withdraw it when needed. Retail banks lend part of customers’ deposits to other individuals and businesses to generate interest. The bank retains most of the interest as its profit and may pass some on to its customers.A key feature of retail banking is having branches across a city, country, or locale where the bank’s customer base is concentrated. Once you have an account with a retail bank, you can walk into any of its branches and access financial services.
Traditional retail banks
Traditional retail banks operate physical branches across their customers’ areas. As a customer, you can visit any branch and speak with a staff member to resolve issues, withdraw money, apply for a loan, and access other services. Before digital banking became ubiquitous, traditional retail banks dominated the scene.Digital-first retail banks
Digital-first retail banks operate primarily online. Every service, from opening an account to depositing money and transferring funds, is conducted online. These banks are licensed and regulated just like traditional retail banks, but they don’t have physical branches. Many customers increasingly prefer online banking services because of the convenience of accessing everything from a smartphone.A digital-first bank is the most convenient option for everyday transactions and bill payments. They make your daily financial transactions as simple as they can be.
Commercial banks
Commercial banks offer banking services primarily to businesses. These include treasury management, lending, trade finance, asset management, and payment processing services, which help businesses operate in the long run. Just as retail banks focus on individuals, commercial banks tailor their services to meet the needs of various businesses.In Europe, commercial banks are regulated by national bodies and also by the European Central Bank (ECB) in European Union (EU) countries. Deposits are protected by national guarantee schemes, and banking activities are strictly regulated, giving businesses confidence to store their funds and conduct everyday transactions without worry.
What are the main types of commercial banks?
Different types of commercial banks have different ownership structures. They can be public sector banks owned by a government, private sector banks owned by individuals or corporations, or foreign banks headquartered in other countries but operating domestically.Investment banks
Investment banks focus on corporate financial services. They don’t accept deposits or lend money to others. Rather, they act as intermediaries to help businesses raise capital by selling stocks or bonds. They also advise businesses on buying or selling assets and complying with regulations. Investment banks earn revenue by charging clients service fees.Investment banking plays a crucial role in the economy, just like commercial and retail banking. This type of banking simplifies the process through which companies raise funds and buy or sell assets.
What is the difference between commercial and investment banks?
Commercial banks accept deposits from businesses and provide loan services. On the other hand, investment banks don’t accept deposits from businesses. Instead, they help businesses facilitate complex transactions and make money by charging fees for these transactions. Commercial banks manage business deposits and loans, while investment banks offer capital fundraising and advisory services to businesses.Universal banks
Universal banks operate a hybrid model, offering both retail, commercial, and investment banking services. This model is usually the mainstay of big banks that can afford the talent and compliance infrastructure necessary to offer the different types of banking services.Universal banking is more prevalent in Europe, where banks tend to be larger and fewer in number per capita. Although universal banks exist in the U.S., they are less common due to the abundance of standalone commercial or retail banks that focus on their respective niches instead of operating a hybrid model.
Private banks
Private banks provide premium financial services to high-net-worth individuals. Their broad services include tax planning, wealth management, and estate planning. A key feature of private banking is that each client has a dedicated relationship manager with whom they discuss their banking needs. The relationship manager serves as a hands-on financial advisor to the client.Most private banks have minimum asset requirements for clients, ranging from $250,000 to $10 million.
Credit unions
Credit unions are member-owned, not-for-profit institutions licensed to offer banking services. Members share a common interest, such as a location, workplace union, or employer. Credit unions are owned by the members who utilize their services. Any profits are retained by the credit union or distributed to members in the form of lower fees and better banking services.Challenger banks & fintechs
Challenger banks are relatively young, digital-first banks. They’re called “challengers” because they began offering banking services mainly with a digital focus, seeking to usurp the status quo of in-person banking. Although traditional banks retain the largest market share, challenger banks have increasingly grown their market share over time. They are licensed and regulated like typical banks.A key feature of challenger banking is a focus on technology, user-friendliness, and responsive online customer service. For example, challenger banks offer the most user-friendly apps, allowing users to send and receive money, as well as pay for various services directly within the app. With challenger banks, users can also receive perks, such as concert ticket discounts, when they transact frequently.
Specialised European bank categories
Different kinds of banks exist in all regions, but their categorisation isn’t the same. For example, banks are categorised differently in Europe than in the U.S. and other regions, although the differences aren’t wide.In Europe, banks are specifically categorised by their business model. Those that accept deposits, issue loans, and earn interest income are classified as pure retail banks. Banks with large assets are classified as commercial banks, and those that rely on fee-based income are classified as investment banks. Finally, banks that offer various services, including loans, deposit management, and corporate advisory, are categorised as universal banks.
Bank type comparison
| Bank type | What it is | Key services offered | Best for? |
|---|---|---|---|
| Retail bank | Banks that primarily serve individuals | Bank accounts, loans, and credit or debit cards | Individuals |
| Commercial | Banks that serve businesses | Bank accounts, loans, foreign exchange, equipment lending, and trade finance | Small to mid-sized businesses |
| Investment bank | Banks that manage assets and capital fundraising for businesses | Asset management, capital fundraise advisory, merger & acquisition (M&A) advisory, and securities trades | Large businesses |
| Universal bank | Banks that serve both individual and business needs | Savings accounts, foreign exchange, lending, M&A advisory, and asset management | Individuals and businesses needing all financial services from the same banking institution |
| Private bank | Banks that cater to high-net-worth individuals (HNWIs) | Financial planning, estate planning, wealth management, and lending | High-net-worth individuals (HNWIs) |
| Credit union | Member-owned banks | Savings accounts and lending | Individuals seeking lower fees and better customer support |
| Challenger bank | Digital-first banks without physical branches | Deposit accounts, lending, and mobile banking apps | Individuals seeking utmost convenience |
Major European banks
Europe has a robust banking system dominated by some big players. These big players are universal banks that manage hundreds of billions of euros in assets and offer broad services. The top five are HSBC, BNP Paribas, Crédit Agricole, Banco Santander, and Barclays.| Bank | Headquarters location | Total assets (in trillions) | Main business strengths | Digital innovation ratings |
|---|---|---|---|---|
| HSBC | London, U.K. | €2.60 | A robust global presence | Global Private Banking Innovation Awards 2025 (Best Private Bank - Hong Kong SAR, China) |
| BNP Paribas | Paris, France | €2.60 | Business banking | Euromoney Awards for Excellence 2025 (Best Bank for Securities Services and Europe’s Best Investment Bank for DCM and Financing) |
| Crédit Agricole | Paris, France | €2.50 | Universal banking services | SRP Europe Awards 2025 (Most Innovative Product) |
| Banco Santander | Madrid, Spain | €1.80 | Reliable banking services for small to mid-sized businesses | Euromoney Awards for Excellence 2025 (Global Best Bank for Consumers) |
| Barclays | London, U.K. | €1.70 | Excellent customer service | Euromoney Awards for Excellence 2025 (UK’s Best Investment Bank) |
Bank account types overview
Banks offer four main types of bank accounts: Savings, Current (or checking), Certificate of Deposit (CD), and money market accounts. Each type has its unique advantages and reasons to choose it over the others.Savings accounts are simple accounts where you can deposit money, earn minor interest, and withdraw money when needed.
Current accounts are ideal for everyday transactions, not long-term savings. They do not earn interest like savings accounts.
Certificate of Deposit (CD) accounts are designed for long-term savings. They accrue more interest than typical savings accounts, but require depositing money for a specific period, e.g., 6 months or 1 year.
Money market accounts are ideal both for long-term savings and everyday transactions. They earn higher interest rates than typical savings accounts, and you can also withdraw money frequently for everyday transactions.
| Account type | Purpose | Typical minimum balance | Average interest rate | Advantages and limitations |
|---|---|---|---|---|
| Savings | Long-term savings | €10 | 1% to 3% | Advantage: Pays interest on deposits Limitations: Lower interest rates than CD and money market accounts |
| Current | Everyday transactions | €10 | NIL | Advantage: Little to no transaction limits Limitation: Doesn’t pay interest on deposits |
| Certificate of Deposit (CD) | Long-term savings with higher interest rates | €500 to €5,000 | 2% to 4% | Advantage: Higher interest rate than typical savings accounts Limitations: Requires locking up your funds for a relatively long time |
| Money market | Both savings and everyday transactions | €1,000 to €10,000 | 2% to 4% | Advantage: Offers both the benefits of a savings account and a current account Limitations: Withdrawal and transfer restrictions |
Choosing the right bank type
These factors will help you choose the best bank type for your needs:- Location: If your business is located in a specific region, you'll need a bank with a strong presence in this region. This way, you can visit any branch and speak to a staff member when needed, even when travelling for business.
- Costs: Banks charge various fees to their clients, including transaction commissions, ATM withdrawal fees, and transfer fees. Before choosing a bank, research these fees extensively and ensure you’re comfortable with them.
- Interest rates: If you need a savings account, compare different interest rates and choose one you prefer. Some banks pay interest rates between 1% and 4%, while others pay negligible interest of 0.01%, or if at all.
- Services: Consider which services you need apart from deposit accounts. For example, your business could need asset management and investment advice services. If you need a broad range of banking services, a universal banking institution enables you to access these services conveniently.
Why are there so many different types of banks?
The modern economy is very complex, with many businesses of varying sizes and niches. This complexity warrants specialised banking institutions to serve the needs of different businesses.Many types of banks exist to provide the best services for all individuals and businesses, regardless of their specific needs. For example, investment banks help companies manage assets, private banks help high-net-worth individuals manage wealth, and retail banks help individuals manage everyday transactions. This diversity is a strength that enables each bank type to serve its customer base exceptionally well.