How Are Local Small Banks Different From Large Banks?

In light of recent events in the banking sector, many people are wondering about the differences between small, midsize, and large banks. What are the risks and benefits associated with different bank types?

While a bank’s size is determined primarily by the assets it holds, the size of a bank may also influence the range of services and products it offers. Small banks may offer a more personalized customer experience, while big banks may be more comprehensive, offering an array of deposit accounts, loans, insurance, financial planning and wealth management.

When choosing a bank, and understanding how different banks operate, size is only one consideration, however. Whether the institution is a regional or national bank is another factor that can determine whether it’s a good fit for your needs. You may also want to consider whether an institution is insured, as this can help protect your deposits.

Are Small Banks Safer Than Large Banks?

The Federal Deposit Insurance Corporation (FDIC) is an independent agency that helps protect banks and their customers by insuring deposits. The size of a bank doesn’t affect its eligibility for FDIC insurance, therefore the money you have on deposit with an FDIC member bank is fully protected up to $250,000, per depositor, per insured bank, per account ownership category. For those who want to keep a considerable amount of money on deposit, it can be wise to look for those banks that participate in programs that extend the FDIC insurance to cover millions¹.

Also important: Although it’s the customers’ money that’s covered by the FDIC, the agency is funded by premiums paid by the banks and from earnings on investments in U.S. Treasury securities. Customers do not pay for this insurance; they are automatically covered when they open an FDIC-insured account.

Types of Banks

When considering the benefits and drawbacks of different types of banks, it’s important to weigh the size as well as whether the bank is regional or national in scope. You may also want to consider whether a given institution exists only online (i.e. as a digital bank, without brick-and-mortar branches), or provides online services and physical locations.

Small Banks

The criteria that determine a bank’s size can vary widely depending on the source.

According to the FDIC’s definition, small banks are banks with assets of less than $1.384 billion for either of the two calendar years prior to December 31, 2022. That might not seem all that small, but it’s a fraction of the trillions of dollars in assets that some larger banks maintain.

Small banks can also be defined as commercial banks of modest size. So what is a commercial bank? Simply, it’s a bank that accepts deposits, offers savings accounts, and makes loans to customers.

Midsize and Large Banks

Midsize banks have assets that generally fall between $10 billion and $100 billion. Banks with assets north of $100 billion are considered large banks.

Community Banks

Community banks can be small or midsize institutions. They are smaller than regional banks, and like regional banks they may offer specific products that cater to local businesses (e.g. agricultural loans).

Regional Banks

Regional banks are generally larger than community banks, but they are also anchored in a specific geographic area and may have a niche focus.

National Banks

A national bank is a commercial bank that’s chartered by the U.S. Treasury. As part of the national network of U.S. banks, a national bank has a defined role in the country’s banking system, including an ongoing relationship with its local Federal Reserve Bank.

While many of the nation’s biggest banks are national banks — e.g. J.P. Morgan Chase, Bank of America, Wells Fargo, Citibank — SoFi is smaller in size but holds a national charter.

The important thing to understand if you’re inquiring into the merits of one bank versus another is that the size, products, services, features, and focus of an institution can overlap in various ways.

Other Types of Financial Institutions

The above only covers some of the most common types of banks. Here are some others.

•   Savings and loan associations are financial institutions that are primarily focused on helping customers get residential mortgages.

•   Niche banks focus on a particular audience, such as medical professionals, farmers, or the LGBTQ+ community.

•   Mutual savings banks are a kind of credit union that originally served low-income communities and focused on providing mortgages.

•   Community Development Financial Institution (CDFI) banks. Many people may wonder what is a CDFI? These are financial institutions that aim to create economic opportunity for individuals and small businesses, quality affordable housing, and essential community services.

•   Online banks provide services online rather than via bricks-and-mortar branches.

•   Neobanks are fintech businesses that operate in similar ways to an online bank. They may partner with FDIC-member banks or other financial institutions to offer accounts and banking services through an app or online. Neobanks, however, do not have bank charters and technically aren’t banks.

You may notice that some of the organizations mentioned above are defined as thrifts or credit unions. When comparing credit unions vs. banks, the main difference to note is how they operate.

Credit unions operate on a membership basis; there are usually specific requirements to join. A credit union is member-owned while a bank is not. Both can offer deposit accounts and loans, though credit unions return profits back to members in the form of higher rates for savers and lower rates for borrowers.

How Small Banks Differ From Large Banks

When looking at big banks vs. small banks, there are a number of things that set them apart beyond the scope of their assets. Understanding the main differences can help if you’re on the fence about whether to open an account at a large bank or bank locally instead.

Here are some of the most notable ways big banks and small banks differ.

Tips for Choosing a Bank

There are a number of things to consider when picking a bank to make sure you find the right fit. If you’re hunting for a new bank, here are some of the most important questions to ask:

•   What kind of banking products and services do I need? And what kind of banking products and services are offered?

•   Do I feel comfortable and safe banking online-only, or will I need branch banking services from time to time?

•   How much can I expect to pay in fees for an account?

•   What kind of interest rates do deposit accounts earn?

•   Is there a minimum deposit requirement or a minimum balance requirement?

•   How large is the ATM network? Are there any fee refunds for using out-of-network or foreign ATMs?

•   When is customer support available and how can I reach them?

•   Are online and mobile banking access available?

•   Will a teller or bank officer be available if I need to consult with someone, person to person?

•   Does the bank support the community in any way?

Whether you’re considering a big bank or a small bank, check to see if it’s FDIC-insured. Again, FDIC insurance covers deposits up to $250,000 per depositor, per ownership category, per bank in the rare event of a bank failure. And some banks participate in programs that extend that coverage to millions.

Banking With SoFi

Switching to a new bank can seem a little daunting, but it can be worthwhile if you’re not 100% thrilled with your current banking situation. Choosing a small bank over a large bank could be a good fit if you want banking services with a personal feel. If you crave more product offerings or the latest tech bells and whistles, however, a large bank could be a better fit.

Choosing a bank is all about deciding what matters most to you and understanding what different financial institutions offer. With that knowledge, you can find the right fit.

Banking online is a great alternative if you don’t necessarily need brick-and-mortar branches. Online banks, like SoFi, can offer some rewarding options. For instance, when you open a high yield bank account at SoFi with direct deposit, you won’t pay any of the usual account fees, plus you’ll earn a super competitive APY.

FAQ

How is a small bank different from a large bank?

Small banks can differ from large banks in a number of ways, including assets, products and services offered, geographic footprint, and cost. The most common metric used to measure bank size involves assessing its assets according to FDIC guidelines.

Should I switch to a local bank?

Switching to a local bank could make sense if you want to bank close to home and enjoy having a personal relationship with the bank’s staff. When comparing local banks, consider the types of accounts and services offered, the fees you’ll pay, how you’ll be able to access your money, and customer support.

What is an advantage of local community banks?

Local community banks can offer numerous advantages, starting with personalized service. A local bank may be less costly than a larger bank and have lower employee turnover. You can also bank closer to home and may find that the financial institution offers special products and programs tailored to the local community.

Photo credit: iStock/Drazen_

¹SoFi Bank is a member FDIC and does not provide more than $250,000 of FDIC insurance per legal category of account ownership, as described in the FDIC’s regulations. Any additional FDIC insurance is provided by banks in the SoFi Insured Deposit Program. Deposits may be insured up to $2M through participation in the program. See full terms at SoFi.com/banking/fdic/terms. See list of participating banks at SoFi.com/banking/fdic/receivingbanks.

SoFi members with direct deposit activity can earn 4.60% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a deposit to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate.

SoFi members with Qualifying Deposits can earn 4.60% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.60% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.

Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

Interest rates are variable and subject to change at any time. These rates are current as of 10/24/2023. There is no minimum balance requirement. Additional information can be found at http://www.sofi.com/legal/banking-rate-sheet..

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