Banking in the United States is complex, with many levels, regulating bodies, and types of operations and specializations. Understanding the banking system can be difficult at the best of times, but it’s important – especially in the payments industry – because banks play such a huge role in not only serving the needs of consumer and corporate clients, but also informing and transmitting monetary policy and driving the economy through lending and credit. 

The following is a rundown of some of the main classifications of banks in the United States, how each is chartered and regulated, and what purpose each serves in the market. While this is by no means a comprehensive breakdown of the many wrinkles in a highly complex industry, it provides a useful overview of how the industry is divided up along high-level lines. 

 

National vs. State Banks

On the most general level, American banks can be classified as national or state institutions. National banks are chartered by the U.S. Treasury Office of the Comptroller of the Currency (OCC) and authorized to operate across the entire country. State banks are chartered by a specific state government. Many are still very large institutions, especially in states like California, Florida, Texas, and New York with large populations. But, because they lack a charter from the OCC, state banks are not allowed to expand nationally. 

 

American Banks by Business Type

The next way American banks can be classified is by the type of business they do. There are three types of banks (outside of the Federal Reserve – America’s central bank):

  • Retail banks serving consumers
  • Commercial banks serving businesses
  • Investment banks serving large corporations

The vast majority of the largest banks in the United States operate in all three categories, albeit as separate entities with protective walls and sometimes different branding between each. For instance, J.P. Morgan and Chase Bank are the commercial/investment and consumer sides of the same large institution, JPMorgan Chase & Co. 

Retail Banks

Retail banks, also known as consumer banks, focus on the banking needs of “retail” clients – the general public. Retail banks offer a wide scope of services covering everything an average person might need from a financial institution. That includes:

  • Checking and savings accounts
  • Lines of credit
  • Loans
  • Mortgages
  • Credit card issuing
  • Electronic transfers
  • Retail investments like mutual funds and IRAs

Retail banks are generalists. They offer wide-ranging services because their goal is to gain as many clients as possible and to capture as many of each client’s financial activities as they can. Some of the most well-known retail bank brands in the United States include Capital One, Chase, Bank of America, and Wells Fargo – all of which also have extensive commercial operations. 

Commercial Banks

Commercial banks, also known as corporate banks, focus on the needs of businesses, both big and small.  Every business needs many of the same day-to-day banking services that the general public does. But, most businesses also have unique needs like funding for large capital acquisitions, large-scale cash management, payroll services, commercial real estate, and others. Commercial-specific operations enable banks to provide more streamlined, more cost-effective access to the specialized services businesses need but consumers generally don’t. 

There are well over 4,000 commercial banks across the United States. According to the Federal Reserve, the five largest are J.P. Morgan, Bank of America, Citibank, Wells Fargo, and U.S. Bank. 

Investment Banks

Investment banks are specialized institutions that focus on complex services for corporate clients. Probably the most well-known role investment banks play is acting as an intermediary for corporations looking to issue stocks and bonds. As a market intermediary, investment banks advise companies leading up to IPO, perform underwriting, gauge demand, publish reports for potential investors, and help raise capital. Investment banks also provide a wide variety of other highly complex services, like facilitating mergers and acquisitions, financial advising, and more. 

Because investment banks are generally branches of larger institutions with diversified operations, a natural conflict exists between the side handling IPOs and acting as a market intermediary and the side that trades in the same markets. As a result, the SEC requires strict information barriers – sometimes known as “Chinese walls” – to be placed between dependents anywhere a potential conflict of interest exists around valuable confidential information.  

In the U.S., the “big four” full-service investment banks are J.P. Morgan, Goldman Sachs, Citigroup, and Morgan Stanley.

 

American Banks by FDIC Charter Class

A more complex way banks are classified is by Federal Deposit Insurance Corporation (FDIC) charter type. The FDIC is a U.S. government bank that insures the deposits held by commercial and retail banks around the country. It provides five different types of bank charter based on a number of different factors, including national or state status and supervising organizations.  

N – National Chartered Commercial Bank Supervised By The Office Of The Comptroller Of The Currency

SM – State Charter Fed Member Commercial Bank Supervised By The Federal Reserve

NM – State Charter Fed Nonmember Commercial Bank Supervised By The FDIC

SA – State Or Federal Charter Savings Association Supervised By The Office Of Thrift Supervision Or Office Of The Comptroller Of The Currency

SB – State Charter Savings Bank Supervised By The FDIC

 

Banks vs. Credit Unions

Credit unions and banks are similar in many ways, but it’s worth making the distinction between the two due to some key differences. First and foremost, while banks are privately owned, credit unions are all non-profit, tax-exempt organizations owned by their members. And, while credit unions do require licensing, they’re not licensed by the same governing bodies as for-profit banks. Instead, credit unions are chartered through the National Credit Union Administration (NCUA) or state-level credit union regulators. Credit unions are also insured differently, falling under the NCUA as opposed to the FDIC. 

Because they’re non-profit co-ops, credit unions generally have more limited services and locations than for-profit banks. However, because they’re more community-oriented, credit unions may also be more flexible with lending and are often known for providing a better customer experience than larger, more rigid for-profit banks. 

 

Issuing vs. Acquiring Banks

In the payments world, banks are often discussed as being either issuing banks, acquiring banks, or both. The two terms describe how a bank interacts with credit card payments and the major card networks like Visa and Mastercard. 

Credit Card Issuing Banks

An issuing bank is an institution that can issue branded credit cards to consumers and businesses on behalf of the major card networks. In most cases, issuing banks partner with a single card network and offer credit cards that fall under that network’s rules and regulations. In exchange, the issuing bank receives the bulk of the interchange fees charged on each transaction made with one of its credit cards. However, new legislation floating around Congress – the Credit Card Competition Act – could see issuing banks forced out of exclusive arrangements with card networks in order to maximize choice, bolster competition and bring down fees. 

Credit Card Acquiring Banks

On the other side of credit card transactions are acquiring banks. The money from every credit card transaction always ends up in a merchant account – either one directly held by a merchant or through a sub-account from a payment facilitator. Acquiring banks are the institutions that issue those merchant accounts to businesses to make accepting credit card payments possible. Like issuing banks, acquiring banks are credit card association members and receive a slice of the interchange fees generated by each transaction. However, unlike issuing banks, there are no exclusivity agreements between the card networks and acquirers. 

 

About IRIS CRM

IRIS CRM (an NMI company) is the payments industry’s leading customer resource management platform. It acts as the nerve center of NMI’s full commerce enablement offering, centralizing, automating, and streamlining all the most important aspects of merchant acquiring. From automated onboarding, to instantaneous residual calculations, to better merchant and portfolio analytics and beyond, IRIS CRM enables ISOs, PayFacs, ISVs, and acquiring banks to work smarter and generate more new business while minimizing both time and costs. 

To find out more about everything a payments CRM can do for your business, schedule a free guided demonstration of IRIS CRM today.