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.
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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.
| Big Banks | Small Local Banks |
|---|---|
| Can offer a wide range of financial products and services, including deposit accounts, loans, credit cards, insurance, business banking, and wealth management | May have a narrower range of products and services; may offer products and services that serve the local community or a specific population |
| Usually have a sizable ATM network, as well as numerous branch locations | Typically have a smaller ATM network and fewer branches |
| May charge higher fees for ATMs and other services and offer lower interest rates on deposit accounts | May charge fewer and/or lower fees and offer more competitive rates on deposit accounts and loans |
| Service is often standardized and designed to fit all customers | Services may be more personalized |
| May use the latest technology, with an emphasis on mobile and online banking | May be slower to pick up on and adopt the latest tech trends |
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 can earn up to 4.20% annual percentage yield (APY) interest on Savings account balances (including Vaults) and up to 1.20% APY on Checking account balances. There is no minimum direct deposit amount required to qualify for these rates. Members without direct deposit will earn 1.20% APY on all account balances in Checking and Savings (including Vaults). Interest rates are variable and subject to change at any time. These rates are current as of 4/25/2023. There is no minimum balance requirement. Additional information can be found at http://www.sofi.com/legal/banking-rate-sheet.
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