Differences Between Commercial Banks, Credit Unions, and Online Banks

Commercial banks are just one type of several that you can open an account with. Choice of institution will depend on several factors including types of accounts available (savings, checking), safety of deposits (are deposits insured), operating hours, ATM network, convenience, international access, minimum balance, fees and interest on deposits & loans.


Commercial Banks

Commercial banks have by far the highest proportion of bank accounts in the country. Other than the core characteristics, commercial banks are diverse ranging from small banks operating 2 or 3 branches within a state, to the large multinational banks with hundreds of thousands of employees and numerous branches in and outside the US.

Benefits for account holders:

  • Deposits of up to $250,000 are explicitly guaranteed by the FDIC (Federal Deposit Insurance Corporation)
  • Commercial banks are heavily regulated by several institutions including the FDIC, Federal Reserve, the OCC (Office of Comptroller of Currency) and (for listed banks) the Securities and Exchange Commission (SEC).
  • A diversified service range including sophisticated products and services such as equity research and private wealth management that would be impossible or difficult to find in credit unions, thrifts and online banks.
  • Extensive branch network. Not all commercial banks have large networks but the average commercial bank has more physical branches than an average thrift or credit union.


Credit Unions

Credit unions are financial institutions established and operated by members. Anyone that opens an account with a credit union effectively becomes a member and partial owner of the credit union. Any profits realized are shared between the union’s members. The law requires that membership of each credit union is restricted to a profession, religious organisation, community, employer or industry. To find a credit union that you would be eligible to join go here.

There are two types of credit unions – federal and state. Federal credit unions are regulated by the NCUA (National Credit Union Association), a body that serves a similar role as the FDIC does for commercial banks. State credit unions on the other hand are governed by state laws.

Benefits for account holders:

  • Better interest rates on deposits and lower rates on loans compared to commercial banks.
  • Deposits of credit unions are protected by the government up to $250,000 account as long as the credit union is state or federal-chartered and participates in the NCUSIF (Nation Credit Union Savings Insurance Fund).


Online Banks

In theory, there is no difference between commercial banks and online banks except that the latter operates over the internet. The purest form of an online bank is one that has no physical branches. However, many commercial banks have extensive internet banking products or services that minimize the need for a customer to physically visit a branch. This means that a majority of online banks today are in fact an extended service from a commercial bank with physical branches. Pure online banks are a more recent phenomenon but have seen remarkable growth.

Benefits for account holders:

  • Convenient access. You can access and operate your account from anywhere in or outside the US as long as you have an internet connection. That being said, many banks restrict the services you can access from outside the country as a way of reducing internet fraud.
  • Lower overheads mean online banks can deliver equivalent service at a much lower cost than their brick-and-mortar counterparts. This has seen lower account operation costs and higher interest rates on deposits. Many online banks offer bank transfers at near zero cost.


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