Table of Contents
A depository institution is a financial institution into which consumers can deposit funds and where they will be safely held. Banks and credit unions are typical examples of these institutions.
Learning about how these institutions work and their pros and cons can build your financial literacy.
Key Points
• A depository institution is a financial organization, such as a bank or credit union, that accepts deposits and keeps customers’ money and assets secure.
• These institutions allow consumers and businesses to deposit funds through methods such as cash, checks, direct deposits, ATMs, and electronic transfers.
• Depository institutions protect deposits through government-backed insurance programs such as the Federal Deposit Insurance Corporation (FDIC) or National Credit Union Administration (NCUA).
• Common types of depository institutions include commercial banks, credit unions, and savings institutions, each offering different ownership structures and financial services.
• Depository institutions help provide safe storage and interest-earning opportunities for funds, but they may also charge fees and generally offer lower growth potential than investment products.
What Is a Depository Institution?
A depository institution is a place or entity, such as a bank, that allows consumers and businesses to deposit money, securities, and/or other types of assets. There, the deposit is kept safely and may earn interest.
To share a bit more detail, depository institutions are financial institutions that:
• Engage in banking activities
• Are recognized as a bank by either the bank supervisory or monetary authorities of the country in which it is incorporated
• Receive substantial deposits as a part of their regular course of business
• Can accept demand deposits
In the U.S., federally insured offices of the following are considered to be depository institutions:
• Commercial banks
• Mutual and stock savings banks
• Savings or building and loan associations
• Cooperative banks
• Credit unions
• International banking facilities of domestic depository institutions
How Do Depository Institutions Work?
A depository can receive funds from consumers and businesses via such means as:
• Cash deposits
• Direct deposit
• Teller or ATM deposits
• Check deposits
• Electronic fund transfers,
The depository institution holds these funds, and they are insured by the Federal Deposit Insurance Corporation (FDIC) for up to $250,000 per depositor, per account ownership category, per insured bank. If the institution is a credit union, funds will be similarly protected by the National Credit Union Administration, or NCUA vs. FDIC.
Funds are accessible on demand (i.e., demand deposits rather than time deposits), and depository institutions are required to maintain sufficient reserves, including cash in their vault and/or balances at the Federal Reserve, to ensure they have funds available for clients.
Customers are able to earn interest on some types of deposits. The depository institution also earns interest: It’s one of the ways financial institutions make money. It does so by lending money from deposited funds to customers in the form of different types of loans. For instance, some of the money on deposit might earn the account holder 2.00% interest, while the bank then uses the funds for a mortgage that charges 6.00% interest. This creates a positive interest spread for the depository institution.
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Types of Depository Institutions
To better understand the purpose depository institutions serve, let’s look at some examples.
Credit Unions
Credit unions may offer many of the same services as banks, but they are owned by account holders, who are also sometimes called members. These institutions are not-for-profit financial cooperatives. The earnings that a credit union generates are returned to members in the form of dividends or are reinvested into the credit union. To put it another way, the depositors are partial owners of the credit union. You often need to live in a certain area or work in a certain profession to keep your money at a credit union.
Commercial Banks
Commercial banks are what many of us visualize when we hear the term “bank,” whether we are thinking of a major bank with hundreds of brick-and-mortar branches or an online-only entity. They are usually owned by private investors and are for-profit organizations.
Commercial banks tend to offer a greater diversity of services compared with other depository institutions, from personal banking to global banking services, such as foreign exchange-related services, money management, and investment banking. The offerings may depend on how large the institution is and which customer segments it serves (say, consumers and different types of businesses).
Savings Institutions
Savings institutions are financial institutions that often serve local communities and focus on consumer lending. Consumers deposit their money in these institutions, and in return, they can access credit cards, consumer loans, mortgages, and small business loans.
It’s possible to set up a savings institution as a corporation or as a financial cooperative. The latter makes it possible for depositors to have an ownership share in the savings institution.
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Depository Institutions vs Repositories
Repositories and depositories are two different things despite the fact that their names sound similar. Here are some of the key differences.
• Depositories hold cash and other assets, while repositories hold information such as knowledge, files, and data.
• Depositories are usually credit unions, banks, and savings institutions, while repositories are typically libraries, data-storage facilities, and information-based websites.
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Depository Institutions vs Nondepositories
Unlike depository institutions, nondepository institutions don’t accept demand deposits. These are some of the differences between these two types of institutions:
• Depository institutions accept deposits and store them for safekeeping. Nondepository institutions, on the other hand, provide financial services but can’t accept demand deposits for safekeeping.
• Depository institutions are FDIC- or NCUA-insured, while nondepository institutions may be Securities Investor Protection Corporation (SIPC)-protected or have other types of regulatory protection.
• Credit unions and banks are commonly depository institutions. Nondepository institutions are often brokerage firms and insurance companies.
Pros of Depository Institutions
Depository institutions have a few benefits to note:
• Money is safe and FDIC- or NCUA-insured.
• Accounts can earn interest on time deposits such as certificates of deposit (CDs) and possibly other deposits.
• They help keep the economy healthy by allowing depository institutions to lend out deposits and earn interest.
• Assets have a reduced risk of being lost or stolen.
Cons of Depository Institutions
There are a few downsides to depository institutions. Consider these points:
• Deposited funds have limited growth potential compared to investments, money market accounts, and CDs.
• Banks, credit unions, and savings institutions may charge fees for holding funds.
• A minimum account balance may be required for some accounts.
Tips for Choosing a Depository Institution
When it comes time to choose a depository institution, it can help to keep the following things in mind when comparing different options.
• Type: Carefully consider if a credit union, savings institution, or commercial bank is the right fit. Some commercial banks have brick-and-mortar locations, while others offer all of their services online. Online banks usually pay higher interest rates on savings and charge fewer and/or lower fees since they don’t have the overhead associated with operating branch locations. Credit unions also tend to offer higher interest rates and lower fees, as they are not-for-profit, whereas commercial banks are for-profit.
• Features: Look for a depository institution that offers perks and services that suit your needs. Special features may include high interest rates, early access to direct-deposit paychecks, cash back deals, no-surcharge ATMs, and complimentary access to credit scores.
• Fees: Shop around to see which depository institution has the lowest and/or fewest fees, such as account maintenance fees and overdraft fees. As noted above, credit unions tend to charge lower and/or fewer fees than commercial banks, as do online banks.
• Convenience: If you like to bank locally and know your bank tellers and officers, choosing an institution that has branches in your neighborhood is a wise move. If you prefer the seamlessness of banking 24/7 by app, however, you might opt to open an online savings account.
The Takeaway
Commercial banks, credit unions, and savings institutions are all examples of depository institutions. Depository institutions can be places to safely store funds that can then be readily accessed. Funds will typically be insured by either the FDIC or NCUA up to their usual limits of $250,000 per depositor, per account ownership category, per insured institution.
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FAQ
What is the difference between a bank and a depository?
There is no difference between a bank and a depository. A bank is a type of depository institution. Credit unions and savings institutions can also be depositories.
What are the types of depository institutions?
There are three main types of depository institutions. Commercial banks, credit unions, and savings institutions are all types of depository institutions.
Are commercial banks depositories?
Yes. Commercial banks are one kind of depository institution where consumers can securely stash their money.
Photo credit: iStock/Mikhail Bogdanov
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