If you’ve heard the expression “chartered bank” and wondered what exactly that means and whether it’s different from any other bank you might drive past, here’s your answer. A chartered bank is a bank whose operations and services are governed by a charter issued at the state or federal level.
A charter is a legal document that essentially tells the bank what it can and can’t do. Chartered banks can be commercial banks but they can also operate as savings banks, savings and loan associations, online-only banks, or credit unions.
So what does it mean if a bank is chartered, in terms of how you can use them to manage your money?
Chartered banks can accept deposits and make loans, just like other banks. There are, however, a few characteristics that make chartered banks unique.
Read on to explore those features and more, including:
• What is a chartered bank?
• What is a state-chartered bank?
• How do chartered banks vs. online banks compare?
• How do chartered banks vs. commercial banks compare?
What Is a Chartered Bank?
A chartered bank is any bank that’s authorized to accept deposits or lend money according to the terms of a legally recognized charter. Chartered banks are subject to oversight from the government agency that issues their charters.
Like other banks, chartered banks can offer different types of financial accounts, including:
• Checking accounts
• Savings accounts
• Money market accounts
• Certificate of deposit accounts
• Specialty accounts, such as custodial accounts or bank accounts for college students
Chartered banks can also offer various types of loans, including personal loans, auto loans, lines of credit, and mortgages.
A chartered bank may have a physical footprint with brick-and-mortar branches and ATMs. Or it may operate online-only. Both traditional and online chartered banks can allow customers to access their money via online banking, mobile banking, or phone banking.
How Does a Chartered Bank Work?
Chartered banks work by accepting deposits and making loans. When you deposit money into a savings account at a chartered bank, for instance, the bank may pay you interest on those funds. Meanwhile, the bank uses your deposits and those of other customers to make loans, charging borrowers interest in the process. That’s largely how banks make profit.
A chartered bank can also generate revenue by charging its customers fees. If you’ve ever paid an overdraft fee, for example, you’re aware of how much a single fee can add up to. How much you pay in fees to a chartered bank can depend on whether you’re dealing with a brick-and-mortar or online bank. Since online banks tend to have lower overhead costs, they can pass the savings on to their customers in the form of higher rates on deposits and lower fees.
Banks must apply for a charter; they’re not granted automatically. Each state sets its own requirements for state-chartered banks. The Office of the Comptroller of the Currency (OCC) regulates federally-chartered banks. Regardless of whether the bank is chartered by the state or federal government, the bank must insure deposits through Federal Deposit Insurance Corporation (FDIC) coverage. The bank must also apply for approval to join the Federal Reserve System if it wishes to do so.
Chartered banks may or may not be part of the SWIFT banking system. SWIFT, short for Society for Worldwide Interbank Financial Telecommunication, is an electronic messaging system that’s used to send financial transactions around the world. A chartered bank can, however, still process wire transfers and other electronic transactions even if they’re not part of SWIFT.
What Is a State Chartered Bank?
You may wonder what it means if a bank is chartered by the state vs. the federal government. Here’s a closer look.
A state-chartered bank is a bank that receives its charter from the state. As such, it’s subject to regulation by the chartering agency in that state. Again, the requirements to obtain a charter and the rules the bank is expected to follow once they secure a charter will depend on the state.
In California, for example, the process to become a chartered bank is similar to the process for establishing a commercial bank. Before a bank can apply for a charter, it has to complete a feasibility study, receive approval to proceed from the local government, and receive voter approval. The application itself is just a simple, two-page form.
State-chartered banks that are part of the Federal Reserve System are regulated by the Fed. Any state-chartered bank that isn’t part of the Federal Reserve System is regulated by the FDIC instead. The FDIC regulates approximately 5,000 state-chartered banks and savings associations.
What Is a Federally Chartered Bank?
Next, here’s a look at what a federally chartered bank is. It’s a bank that receives its charter from the federal government. The Office of the Comptroller of the Currency is responsible for regulating nationally-chartered banks and savings associations. The OCC is an independent branch of the Treasury Department.
Federally chartered banks are authorized to operate on a national scale. A federally chartered bank can be a traditional financial institution or an online banking platform.
Get up to $300 when you bank with SoFi.
Open a SoFi Checking and Savings Account with direct deposit and get up to a $300 cash bonus. Plus, get up to 4.60% APY on your cash!
Chartered Bank Oversight
Now that you know what is a chartered bank and what isn’t, here’s a bit more about how chartered banks are regulated. They are typically subject to oversight from the agency that issued their charter. Generally speaking, this oversight is designed to ensure the smooth operation of the bank itself while protecting consumer interests. Some of the things chartering agencies do include:
• Visiting the bank to conduct on-site examinations
• Monitoring the bank’s compliance with banking laws
• Issuing regulations to cover banking operations
• Taking enforcement actions when a bank violates a regulation or rule
• Ensuring that the bank is financially sound and is conducting ethical banking practices.
In extreme cases, the chartering agency may revoke the bank’s charter or close a bank if it fails. In the case of FDIC member banks, the FDIC steps in to cover deposits for customers. The current FDIC coverage limit is $250,000 per depositor, per account ownership type, per financial institution.
Chartered vs Online Banks
A bank can be chartered and have branches, or it can be chartered and operate online. In terms of what’s different between chartered banks that have physical branches and those that operate online, here are a few things to know:
• Online banks tend to offer higher rates to savers.
• Online banks may also charge fewer fees, since they have lower overhead costs.
• Brick-and-mortar chartered banks may offer a wider selection of banking products and services.
• Traditional chartered banks can offer in-person banking, while online banks may limit you to accessing your account online or via a mobile banking app.
Whether it makes sense to choose a traditional chartered bank vs. an online bank can depend on your preferences and needs. If you want to get the best rates on savings and don’t mind branchless banking, then you might choose an online bank. On the other hand, if you like being able to pop into a branch from time to time, you might prefer a brick-and-mortar chartered bank.
Recommended: Online vs. Traditional Banking: What’s Your Best Option?
Chartered vs Commercial Banks
A commercial bank is a financial institution that engages in banking services, including accepting deposits and making loans. In that sense, it sounds similar to a chartered bank. In fact, a commercial bank can be a chartered bank, though not all commercial banks are.
Examples of chartered commercial banks include:
• National banks that are chartered by the OCC
• Non-member banks that are state-chartered but not part of the Federal Reserve System
• State member banks that are state-chartered and part of the Federal Reserve System.
When comparing a chartered vs. commercial bank, the main difference is the charter. A chartered bank is required to have either a state or national charter; a commercial bank may be chartered, but it isn’t required to be in order to operate.
Should I Do Business With a Chartered Bank?
Whether you opt to do business with a chartered bank is a matter of personal preference. Opening accounts with a chartered bank could give you some peace of mind since you know the bank is subject to regulation. And in the rare event that the bank fails, the FDIC can step in and restore your deposits to you.
When comparing chartered banks, consider things like:
• Account types offered
• Account fees
• Interest rates for deposit accounts
• Interest rates for loans if you plan to borrow
• Minimum deposit requirements
• Access and convenience
• Customer support availability
Security is another factor to weigh. The safety of mobile banking, for instance, might concern you if you’re used to managing your accounts at a branch or ATM. The good news is that online banks, chartered or not, have increasingly stepped up security efforts to protect customer accounts.
Keep in mind that you’re not limited to just one bank either. You may choose to open a checking account at a traditional chartered bank, for instance, and a high-yield savings account at an online bank. If you’re wondering, “Should I have a lot of bank accounts?” it can be helpful to have checking and savings at a minimum. You can use checking to hold the money you plan to spend now, and savings for the money you want to grow. Or you might prefer a simple hybrid approach that gives you the best of both worlds in one place.
Recommended: How to Open a New Bank Account
The Takeaway
Whether you open your accounts at a chartered bank or not, it’s important to find a financial institution that matches your needs. If you’ve only ever done business with traditional banks, you may want to consider the merits of using an online bank.
SoFi holds a national banking charter. When you open an online bank account with us, you get the convenience of spending and saving in one convenient place. What’s more, if you sign up with direct deposit, you’ll earn an ultra competitive APY and pay no fees, which can help your money grow faster. Qualifying accounts can even get paycheck access up to two days early.
FAQ
Are all banks federally chartered?
No, not all banks are federally chartered. Some banks hold a state charter instead.
What is a non-chartered bank?
A non-chartered bank is a bank that does not have a federal or state charter. Neobanks are an example of a bank that has no charter, though technically, they do not meet the strict definition of a bank.
What is the difference between a state and federally chartered bank?
State-chartered banks receive their charters from state agencies. They’re subject to regulation by the FDIC or the Federal Reserve if they’re part of the Federal Reserve System. Federally-chartered banks receive their charters from the federal government and are regulated by the OCC, or Office of the Comptroller of Currency.
Photo credit: iStock/ultramarine5
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2023 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
The SoFi Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.
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 https://www.sofi.com/legal/banking-rate-sheet.
Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.
SOBK0322046
